The Real Estate Finance Journal...The nal rules on real estate transactions follow in structure the...

FROM THE EDITOR 3

Foreign Ownership of Real Estate: New Rulesfrom CFIUSAntonia I. Tzinova, Gordon Griffin, and Caroline D. Bisk 7

Real Estate Financing in the Healthcare Space:Keep Your Eye on the BallRyan C. Craig and Merle M. De ancey Jr. 15

A Loan Trader’s Guide to FIRPTA Withholdingand Mixed Asset RecoveriesChristopher S. Campbell and Charles M. Cole 19

Changes to New York Rent Regulations FaceChallengeJennifer S. Recine James L. Bernard, David J. Kahneand Patrick N. Petrocelli 25

Treasury and HUD Propose Housing FinanceReformsDwight C. Smith 31

Get a Grip on the Cash Conversion Cycle byOpt mizing the Customer JourneyShamir Duverseau 35

SEC Grants No-Action Relief Relating to Statusof Certain Mortgage Se vicing Rights and CashProceeds nder Section 3(c)(5)(C) of the InvestmentCompany ActJ. Gera d Cummins, Jason A. Friedhoff, Brian M. Kaplowitz,

39

FHA Deal Accelerators: Embrace theBureaucracyJim Provenzale 43

FHA Deal Accelerators: How to Secure Buy-InFrom Secondary Lenders and CommercialTenantsJim Provenzale 47

California’s 2020 Housing Laws: What YouNeed to KnowChelsea Maclean, Daniel R. Golub, Kevin John Ashe, andPaloma Perez McEvoy 51

SB 330 Provides Relief to CaliforniaHomebuildersDavid H. Blackwell and Angus C. Beverly 63

New Jersey District Court Leaves PlaintiffWithout Course of Relief Under CERCLAJordan M. Asch 67

New Jersey Governor Murphy Signs ExecutiveOrder Addressing Climate Change Resiliencyfor New JerseyJordan M. Asch 71

REFJThe Real Estate Finance JournalA THOMSON REUTERS PUBLICATION Winter 2019

Mat #42156722

EDITOR

Robert G. KoenMintz, Levin, Cohn, Ferris,Glovsky and Popeo, P.C.

MANAGING EDITOR

Erbayne W. JarvisThomson Reuters

Submissions EDITOR

Steven A. MeyerowitzMeyerowitz Communications Inc.

THE REAL ESTATE FINANCE JOURNAL(ISSN 0898-0209) is published quarterly by ThomsonReuters, 610 Opperman Drive, Eagan, MN 55123-1396.

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CONTRIBUTING EDITORS

Ronald B. Bruder Stephen RushmorePresident and CEOHVS

Stuart M. SaftPartnerHolland & Knight LLP

Joshua Stein

PartnerJoshua Stein PLLC

PresidentThe Brookhill Group

Stevens A. CareyPartnerPircher, Nichols & Meeks

Jonathan L. KempnerFellow, Advanced Leadership InitiativeHarvard University

Youguo Liang, Ph.D.Head, Global Research and

Public

BOARD OF ADVISORS

Jason BarnettVice Chairman & General Counsel RXRRealty LLC

Cia BuckleyPartnerDune Capital Management

Dino P. ChristoforakisHead of Transactions, North AmericaAFIAA U.S. Investment, Inc.

Frederick N. CooperSenior Vice PresidentToll Brothers, Inc.

Louis M. DubinManaging PartnerRedbrick LMD

Andrew L. FarkasCEOIsland Capital

Kyle GoreManaging Director, Real Estate FinanceCGA Group

David HammDirector Real Estate TransactionsRREEF Management L.L.C.

Ross Hilton KemperPresidentKingswood Capital LLC

Ronald J. KravitManaging Principal

Richard LeberManaging DirectorNew York Life Investments

Richard J. MackMack Real Estate Group

Joseph MizrachiManaging MemberThird Millennium Group

Shelby E.L. PruettCEOCapr EGM, LLC

Lorenz ReiblingChairman and Senior PartnerTaurus Investment Holdings LLC

Stephen SiegelChairman, Global Brokerage CBRichard Ellis

Rick H. SingerPresidentWinter Properties

David R. Soares

From the EditorRobert G. Koen*

Welcome to the winter edition of The RealEstate Finance Journal! This issue contains awide variety of articles to keep readers ap-prised of the very latest in real estate finance.

New Rules from CFIUS

The Committee on Foreign Investment inthe United States recently published proposedrules governing the foreign acquisition andownership of real estate, with far-reaching con-sequences for both real estate purchasers andwould-be landlords to the federal government.In their article, “Foreign Ownership of RealEstate: New Rules from CFIUS,” Antonia I.Tzinova, Gordon Griffin, and Caroline D. Bisk,address the recent changes introduced by theForeign Investment Risk Review Moderniza-tion Act of 2018 and the proposed rules withrespect to foreign acquisition of real estate,which will affect a large number of real estatetransactions.

Real Estate Financing in Healthcare

Next, Ryan C. Craig and Merle M. DeLanceyJr. discuss two important developments thatcould affect a lender’s decision whether tofinance real estate transactions involving enti-ties and individuals in the healthcare field intheir article, “Real Estate Financing in theHealthcare Space: Keep Your Eye on the Ball.”

FIRPTA Withholding and Mixed-AssetRecoveries

The purpose of our next article, “A LoanTrader’s Guide to FIRPTA Withholding andMixed-Asset Recoveries,” by Christopher S.Campbell and Charles M. Cole, is to assistloan market participants in identifying ForeignInvestment in Real Property Tax Act issuesthat may arise in connection with loan restruc-turings and other purchases of loans and re-lated proceeds of such loans, and to brieflydiscuss possible solutions to the Act’s valua-tion issues in mixed-asset recoveries.

New York Rent Regulations

The Housing Stability and Tenant ProtectionAct of 2019 makes significant changes to NewYork’s rent regulation laws, and leading indus-try groups quickly announced their intention tomount constitutional challenges to the Act. Inour next article, “Changes to New York Rent

*Robert G. Koen, Esq., the editor of The Real Estate Finance Journal, is a member of the firm Mintz, Levin, Cohn,Ferris, Glovsky and Popeo, P.C., and chair of the firm’s Real Estate Finance Practice, where he focuses on commercialreal estate, with a concentration in real estate acquisitions, finance and complex restructurings for both lender and bor-rower entities. He can be reached at [email protected].

Robert G. Koen, Esq., theeditor of The Real EstateFinance Journal, is amember of the firm Mintz,Levin, Cohn, Ferris,Glovsky and Popeo, P.C.,and chair of the firm’sReal Estate FinancePractice, where hefocuses on commercialreal estate, with aconcentration in realestate acquisitions,finance, and complexrestructurings for bothlender and borrowerentities.

The Real Estate Finance Journal E Winter 2019© 2019 Thomson Reuters

3

Regulations Face Challenge,” Jennifer S.Recine, James L. Bernard, David J. Kahne,and Patrick N. Petrocelli discuss the Takingsand Contract Clauses of the U.S. Constitution,and recent developments in constitutional ju-risprudence that suggest there might be lightat the end of an admittedly long tunnel forproperty owners who feel the changes to exist-ing law went too far.

Housing Finance Reforms

The Treasury Department and the Depart-ment of Housing and Urban Developmenthave released complementary proposals that,if implemented, would result in extensivechanges to federal regulation of housingfinance. Dwight C. Smith explains the propos-als, which include well over 100 recommenda-tions for legislative and regulatory changes, inhis article, “Treasury and HUD Propose Hous-ing Finance Reforms.”

The Cash-Conversion Cycle

Today, marketing plays an ever-increasingrole in shortening the cash conversion cycleas real estate marketers look to develop andoptimize digital strategies and touch points inthe customer’s considered purchase journey.Shamir Duverseau describes a process bywhich real estate finance marketing can beimproved in our next article, “Get a Grip onthe Cash-Conversion Cycle by Optimizing theCustomer Journey.”

Mortgage Servicing Rights and CashProceeds

Our next article, “SEC Grants No-ActionRelief Relating to Status of Certain MortgageServicing Rights and Cash Proceeds UnderSection 3(c)(5)(C) of the Investment CompanyAct,” by J. Gerard Cummins, Jason A.

Friedhoff, Brian M. Kaplowitz, and AndrewM. Friedman, discusses a no-action letter is-sued by the U.S. Securities and ExchangeCommission to a mortgage finance real estateinvestment trust, which may make it easier forcertain entities to satisfy the asset composi-tion test required by the Commission staff inits interpretation of Section 3(c)(5)(C) underthe Investment Company Act of 1940 in re-spect of their holdings of certain mortgageservicing rights and cash proceeds.

FHA Deal Accelerators

Embrace the Bureaucracy

Jim Provenzale contributed two articles onFHA Deal Accelerators. The first, “Embracethe Bureaucracy,” discusses the quest to mini-mize the time between firm commitment andclosing, and how the relationship with HUDcounsel plays a critical role. The author offerspractical tips for managing that relationship,making the HUD attorney’s life easier andboosting the speed of review so you canquickly close the deal.

Secure Buy-In from Secondary Lendersand Commercial Tenants

In his second “FHA Deal Accelerators”article, “How to Secure Buy-In From Second-ary Lenders and Commercial Tenants,” in thecontext of a typical Housing and UrbanDevelopment-insured closing, Jim Provenzaleasks and answers the question: who is leastmotivated to get the note endorsed? He thendiscusses how to keep the least motivated par-ties engaged in the transaction.

What’s Happening in California?

California’s 2020 Housing Laws

A statewide rent control measure, new

The Real Estate Finance Journal


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procedural protections, significant steps for-ward for accessory dwelling units, surplus landamendments, and regional funding authoritiesare among the highlights of California’s 2020housing laws. Chelsea Maclean, Daniel R.Golub, Kevin John Ashe, and Paloma Perez-McEvoy discuss the highlights in their article,“California’s 2020 Housing Laws: What YouNeed to Know.”

Relief for California Homebuilders

California’s governor recently signed SenateBill 330, also known as the “Housing CrisisAct of 2019.” Of particular interest to develop-ers, the legislation creates a new form of statu-tory vested rights, tightens local approvalprocedures, restricts the adoption of newregulations that impede new housing, andprovides new judicial relief options for residen-tial development projects. In their article, “SB330 Provides Relief to California Homebuild-ers,” David H. Blackwell and Angus C. Beverly,explain the new legislation.

What’s Happening in New Jersey?

CERCLA

Jordan M. Asch contributed two articles

covering New Jersey developments. The first,“New Jersey District Court Leaves PlaintiffWithout Course of Relief Under CERCLA”discusses a recent U.S. District Court for theDistrict of New Jersey decision that may betroubling for parties seeking to recover environ-mental cleanup costs under the Comprehen-sive Environmental Responsive Compensa-tion and Liability Act.

Executive Order 89

The second article by Mr. Asch, “New JerseyGovernor Murphy Signs Executive Order Ad-dressing Climate Change Resiliency for NewJersey,” discusses New Jersey Executive Or-der 89, which calls on the Department ofEnvironmental Protection to establish a State-wide Climate Change Resilience Strategy,among other initiatives related to climatechange adaptation.

Enjoy the issue!

From the Editor


5

Foreign Ownership of Real Estate: NewRules from CFIUS

Antonia I. Tzinova, Gordon Griffin, and Caroline D. Bisk*

On January 13, 2020, the Committee on Foreign Investment in the United States publishedfinal rules governing the foreign acquisition and ownership of real estate, with far-reachingconsequences for both real estate purchasers and would-be landlords to the federalgovernment. Although the final regulations largely follow the proposed regulations issuedon September 17, 2019, several changes have been introduced in response to commentsby interested parties. This article addresses the recent changes introduced by the ForeignInvestment Risk Review Modernization Act of 2018 and the final rules with respect toforeign acquisition of real estate, which will affect a large number of real estatetransactions.

The Foreign Investment Risk Review Mod-ernization Act of 2018 (“FIRRMA”) amendedthe rules governing the Committee on ForeignInvestment in the United States (“CFIUS”) toprovide the Committee with the authority toreview minority foreign investments in certainU.S. businesses, as well as certain real estatetransactions, departing from the traditionalfocus on foreign control over a U.S. business.FIRRMA also mandated that CFIUS issue newrules governing the scope of its reviewauthority. On September 17, 2019, CFIUSpublished proposed rules governing the foreignacquisition and ownership of real estate, withfar-reaching consequences for both real estatepurchasers and would-be landlords to thefederal government. The Final regulations

were published on 1/13/20, and become effec-tive on Feb. 13, 2020. CFIUS also publishedan interim rule on the definition of “Principalplace of business” with a 30-day opportunityto comment.

At a high level, the changes introduced byFIRRMA and the final rules are:

1. FIRRMA and the final rules expandCFIUS jurisdiction with respect to realestate, particularly undeveloped land,and allow CFIUS to make forecasts aboutfuture use of undeveloped land;

2. The final rules create a set of exceptions,including a new category of excepted realestate investors, favoring U.S. close al-

*Antonia I. Tzinova is a partner at Holland & Knight LLP practicing in the areas of international trade, foreign directinvestment, and industrial security. Gordon Griffin is a partner at the firm representing building owners, real estatedevelopers, real estate investment trusts, and asset managers. Caroline D. Bisk is an associate at the firm handling awide variety of international trade regulatory and transactional matters. The authors may be reached [email protected], [email protected], and [email protected], respectively.


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lies with established investment riskreviews and compliance records;

3. A real estate covered transaction will nottrigger a mandatory filing requirement;

4. Parties may choose between a short-form declaration and a complete notice,each of which could result in CFIUSconcluding all actions under Section 721of the Defense Production Act; and

5. The CFIUS reform with respect to realestate transactions builds on a trend fromthe last few years of increased scrutinyin leasing office space from foreignowned or controlled lessors by CFIUSand the federal government.

This article addresses the recent changesto the laws governing foreign acquisition ofreal estate in several parts. The first partdescribes the current state of the law, with ananalysis of the federal government’s increasedscrutiny of foreign acquisition of U.S. realestate in recent years. The second part ana-lyzes the new rules governing CFIUS ex-panded jurisdict ion over real estatetransactions. The final part discusses the newcontrols of foreign ownership of federallyleased properties.

A Brief History of CFIUS IncreasedScrutiny of Real Estate

Congress established CFIUS in 1975, witha mandate to review and — if necessary —block any “covered transactions” involving theacquisition of U.S. businesses that wouldresult in foreign control and might pose athreat to U.S. national security.1 Under the oldstandard, a “covered transaction” was anytransaction that was proposed, pending or

concluded by, or with, any foreign person,which could result in control of a U.S. busi-ness by a foreign person.

Before the passage of FIRRMA, CFIUS hadonly limited authority to review real estatetransactions. Covered transactions couldinclude the purchase of real estate, but onlywhen such real estate constituted a “U.S.business.” For example, the sale of leasedproperty that generates revenue could bedetermined to be a covered transaction, andindeed that was how CFIUS approached itsearly real estate oversight responsibilities.Purchases of undeveloped and unleased prop-erty were outside the scope of CFIUSjurisdiction.

The first high-profile CFIUS investigationfocusing on proximity to a sensitive govern-ment facility as opposed to the acquired busi-ness itself was the 2012 Ralls Corp. acquisi-tion of a windfarm in Oregon located within afew miles of a U.S. Navy base where the Navyconducted drone tests. The parties did not filewith CFIUS until after closing, and only at thedirection of CFIUS. On September 28, 2012,President Barack Obama issued an orderrequiring Ralls, a Chinese-owned entity, todivest itself of ownership of the windfarmwithin 90 days, and blocked the use of anywind turbines manufactured by Ralls at thesites in question. Furthermore, Ralls wasinstructed to hire an independent third party,approved by CFIUS, to remove any installa-tions on the land under CFIUS supervision.The unstated concern was that the windfarmwas too close to the Navy base and could beused for espionage on Navy operations.

In 2014, the Chinese-owned Anbag Insur-ance Group purchased the Waldorf Astoria



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hotel in New York. Learning from the Ralls de-cision, the parties submitted voluntarily toCFIUS review. Waldorf Astoria serves as theofficial residence of the U.S. ambassador tothe United Nations, and also serves as an un-official meeting place for diplomats fromaround the world in town for UN business. InFebruary 2015, CFIUS approved theacquisition.

More recently, in 2017, COSCO ShippingHoldings Co., Ltd. (“COSCO”), a Chinese ship-ping company, filed with CFIUS, seeking ap-proval for the acquisition of a controlling inter-est in Hong Kong-based ocean containershipping company Orient Overseas Interna-tional Ltd. (“OOIL”). OOIL had a long-termconcession for the operation of a containerterminal in Long Beach, California. CFIUSultimately approved the acquisition on thecondition that ownership of the Long Beachterminal would be transferred to a trust whoseprincipal trustee was a U.S. citizen for thepurpose of selling to an approved third party.

In all three cases, CFIUS adopted the stan-dard of close proximity to a sensitive facility,either directly occupied by the U.S. govern-ment, or being part of a major port. This hasbecome the basis for the expanded CFIUSjurisdiction introduced by FIRRMA.

FIRRMA and the CFIUS ProposedRules Affecting Real EstateTransactions

FIRRMA provided CFIUS with the authorityto review real estate transactions — to includeleases, sales, and concessions — assumingsuch transactions involve air or maritime portsor properties that are in “close proximity” tosensitive U.S. government facilities. The finalrules implement the FIRRMA changes.2 How-

ever, in the final rules, CFIUS combines thedefinitions for “airport” and ‘‘maritime port’’ intoa new term, “covered ports.” The final rule willtake effect on February 13, 2020.

The final rules on real estate transactionsfollow in structure the existing CFIUS regula-tions at 31 C.F.R. Part 800. This section sum-marizes some of the most important changesintroduced by FIRRMA and developed in thefinal rules.

Covered Real Estate Transactions

Prior to FIRRMA, CFIUS had jurisdiction toreview foreign investments in U.S. real estateonly in situations of acquisitions resulting inforeign control over a U.S. business. UnderFIRRMA, CFIUS jurisdiction is expanded toinclude transactions involving the purchase orlease by, or a concession to, a foreign personof certain real estate in the United States, evenin transactions in which there is no accompa-nying investment in a U.S. business.

The final rule defines “Covered Real EstateTransactions” as any purchase or lease by, orconcession to, a foreign person of coveredreal estate that 1) is, is located within, or willfunction as part of, a covered port; or 2) is lo-cated within certain proximity of specificmilitary installations or other U.S. governmentsensitive facilities, and that affords the foreignperson at least three of the following propertyrights, “whether or not shared concurrently”with another party:

E To physically access the real estate;

E To exclude others from physical accessto the real estate;

E To improve or develop the real estate; or

Foreign Ownership of Real Estate: New Rules from CFIUS


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E To attach fixed or immovable structuresor objects on the real estate.3

Covered Port

The final rule defines “covered port” in anumber of ways. The definition describes anyport that is:

E Listed in the Federal Aviation Administra-tion’s (“FAA”) annual final enplanementdata as a “large hub airport” or a “jointuse airport”;

E Listed in the FAA’s annual final all-cargolanded weight data as an airport with an-nual aggregate all-cargo landed weightgreater than 1.24 billion pounds;

E Any port described by Maritime Adminis-tration as a commercial strategic seaportwithin the National Port Readiness Net-work; or

E A top 25 tonnage, container, or dry bulkport as described by the Bureau of Trans-portation Statistics.4

While acquisitions of a covered port wouldhave been considered an investment in criticalinfrastructure under existing CFIUS regula-tions, FIRRMA and the final regulations expandthe scope of reviewed transactions significantlyto cover the acquisition of real estate locatedwithin the port, or that could function as part ofor as a port. These changes allow CFIUS tospeculate about the future use of undevelopedreal estate.

Within Close Proximity of MilitaryInstallations and Other Sensitive Facilities

To assist the public in identifying the specificsites that meet the definition of “military instal-

lation,” the names and locations of the militaryinstallations are listed in Appendix (“App”) A tothe proposed regulations and cover real estatelocated within:

1) Close proximity of certain military instal-lation or sensitive facility (App. A, parts1 and 2);

2) The extended range of certain militaryinstallations (App. A, part 2);

3) Any county or other geographic areaidentified in connection with certainmilitary installations (App. A, part 3); or

4) Any part of certain military installationslocated within the limits of the territorialsea of the United States (App. A, part4).

The terms “close proximity” and “extendedrange,” which are introduced for the first timein the proposed regulation, and which areretained in the final, apply to specific types ofmilitary installations as described in theregulations. Covered real estate transactionsinclude those effected within “close proximity”of 1) naval surface, air and undersea warfarecenters and research laboratories and majorannexes thereof; as well as 2) Air Force basesadministering active Air Force ballistic missilefields, and those effected within “extendedrange” of:

1) Army combat training centers located inthe continental United States;

2) Major range and test facility base activi-ties as defined in 10 U.S.C. 196;

3) Military ranges as defined in 10 U.S.C.101(e)(1) that are owned by the U.S.Navy or U.S. Air Force; or



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4) Joint forces training centers that are lo-cated in any of the following states:Oregon, Nevada, Idaho, Wisconsin,Mississippi, North Carolina or Florida.

The identification of these categories of realestate is noteworthy, reflecting the increasedattention paid by various U.S. governmentagencies, including the Government Account-ability Office (“GAO”) and the General Ser-vices Administration (“GSA”). While the TrumpAdministration has been firm in its messagingthat FIRRMA is meant to “close gaps” betweenthe transactions that CFIUS is currently ableto review and transactions it currently cannotreview, those “gaps” largely reflect a perceivedrisk from unique Chinese investment trends,including real estate acquisitions in sensitiveareas.

Exceptions

Excepted Real Estate Transactions

Both FIRRMA and the final regulations5

provide that certain real estate transactionswill be exempt from CFIUS jurisdiction. CFIUShas provided more clarity and detail with re-spect to exempt transactions, which include:

E Transactions of an excepted real estateinvestor;

E Transactions that are otherwise coveredby CFIUS jurisdiction to review a trans-action under Part 800;

E With certain limitations, transactions thatrelate to real estate within urbanized ar-eas or urban centers;

E Transactions that relate to a single hous-ing unit, including fixtures and adjacentland as long as the land is incidental to

the use of the real estate as a singlehousing unit;

E The lease or concession of real estate toa foreign person if:

E The foreign person is a foreign aircarrier, but only to the extent that thelease or concession is in furtheranceof its activities as an air carrier; or

E Used only for the purpose of engag-ing in the retail sale of consumergoods or services to the public.6

E Transactions that relate to commercialoffice space within a multiunit commercialoffice building, if such space would notexceed 10 percent of the total squarefootage of the total commercial space,and the foreign person does not repre-sent more than 10 percent of the totalnumber of tenants in the building; and

E Transactions that relate to land owned byAmerican Indian or Alaska Native groups.

Note that just because a real estate trans-action might be exempt because the realestate is located within an “urbanized area” orin an “urban cluster,” it does not necessarilymean that the transaction would not be cov-ered under CFIUS general jurisdiction toreview acquisitions that would result in foreigncontrol over a U.S. business. FIRRMA ex-panded CFIUS jurisdiction so that the excep-tions only apply to qualifying transactions thatwere captured as a result of the expansion.

In addition to the exceptions identifiedabove, lending or other financing by a foreignperson to another person for the purpose ofthe purchase, lease, or concession of coveredreal estate will not by itself constitute a



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covered real estate transaction.7 Similarly, con-vertible instruments would be subject to CFIUSreview only upon the time of imminent conver-sion of such interest.8

Excepted Real Estate Investor

Of particular note is the carve-out with re-spect to “excepted real estate investors.”9

Under the proposed rules, an excepted realestate investor is

E A foreign national who is a national of anexcepted real estate foreign state and isnot also a national of any foreign statethat is not an excepted real estate foreignstate,

E A foreign government of an excepted realestate foreign state, or

E A foreign entity10 organized under thelaws of, and with its principal place ofbusiness in, an excepted real estateforeign state or the United States, and75% of members or observers of itsboard of directors are U.S. nationals, ornationals of an excepted real estateforeign state and are not also nationalsof any other foreign state.

Special aggregation rules apply if there ismore than one foreign entity party to thetransaction. The exception would not apply ifthe foreign investor has provided false infor-mation to CFIUS, violated any mitigationagreement with CFIUS, violated U.S. exportcontrol laws, or committed a felony crime inthe U.S.

CFIUS will maintain a list of excepted realestate foreign states, which may be updatedfrom time to time, and to be published inFederal Register.11 In the FAQs on the final

rule, CFIUS proposed to include Australia,Canada, and the United Kingdom on the list.Beginning February 13, 2022, CFIUS may addother countries to the list.12 An important factorin determining if a foreign state qualifies to beadded to the list will be whether the foreignstate has established and is currently using arobust national security review process itself.The countries on the initial list will have twoyears to ensure that their national security-based foreign investment review process andbilateral cooperation with the U.S. on such aprocess meet the requirements of the newregulations.13

Filing of a Declaration or Notice

Parties to a covered real estate transactionmay submit a voluntary declaration under theproposed rules. Unlike Part 800, which con-tains the proposed rules with regard to othertypes of “covered transactions,” there will beno mandatory reporting requirement. Outsidethat requirement, the filing process for the twoparts is largely the same. Parties may file afull notice, which is the most thorough applica-tion for CFIUS review and will provide the par-ties with a safe harbor following completion ofCFIUS review. Alternatively, parties may file adeclaration, which is a short filing generallynot to exceed five pages.

One potential benefit is that declarations donot require detailed personal information aboutthe directors, officers, and owners of theforeign investor, the gathering of which canoften delay the filing process. CFIUS has 30days to review a declaration and decide how itwants to proceed, which allows for the pos-sibility of a shorter review. On the other hand,by filing a declaration as opposed to a com-plete notice, the parties take the risk that at



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the end of the 30-day review period, CFIUSmight direct the parties to submit a full notice,which will start a new 45-day period of review,which might be followed by a 45-day investiga-tion period. Additionally, CFIUS might decidethat the transaction is covered under Part 800of the CFIUS regulations, and require from theparties information other than that required forreal estate covered transactions. According tothe proposed rules, a transaction that may besubject to CFIUS review will not be subjectunder both Parts 800 and 802. A coveredtransaction under Part 800 that includes thepurchase, lease, or concession of covered realestate is not a covered real estate transactionunder Part 802. Therefore, if a transaction issubject to Part 800, the parties must determinewhether it is appropriate to notify CFIUS of atransaction under those regulations and notunder Part 802, even if it includes real estate.

Increased Scrutiny of ForeignOwnership of Federally LeasedProperties

In addition to increased CFIUS scrutiny ofreal estate transactions, the government hasfocused more attention on the risks associ-ated with the foreign ownership of propertyleased to the federal government. The federalgovernment currently leases much more com-mercial office space than it owns, and the GSAserves as the primary lessee for the govern-ment’s various agencies, which are tenants inGSA leases.

GAO issued a report14 in January 2017 thathighlighted the risks associated with foreignownership of real property. In “FEDERALREAL PROPERTY: GSA Should Inform Ten-ant Agencies When Leasing High SecuritySpace from Foreign Owners,” GAO profiled

the risks associated with foreign ownership offederally leased property. GAO concluded witha recommendation “that the Administrator ofthe [GSA] determine whether the beneficialowner of high-security space that GSA leasesis a foreign entity and, if so, share that infor-mation with the tenant agencies so they canadequately assess and mitigate any securityr isks.” GSA concurred with thisrecommendation.

The GSA, as the government’s largest les-see of commercial real estate, has since takenat least one concrete step in identifying foreignownership. As part of GSA’s procurementpackage for federal leases, it now includes aform entitled “Foreign Ownership and Financ-ing Representation (Acquisitions of LeaseholdInterests in Real Property).” This form requireswould-be lessors to the government to dis-close whether there are any foreign persons,foreign-owned entities, or foreign governmentsin the ownership structure of the offeror or itslenders / financers. Other federal governmentcontractors who are required to register in theSystem for Award Management (“SAM”) arerequired to disclose foreign ownership in a lesscontract-specific manner. Registration requiresdisclosure of a company’s immediate ownerand ultimate owner, thus providing the govern-ment with some visibility into the existence offoreign ownership.15

Conclusion and Takeaways

The final CFIUS regulations are likely tohave profound impacts on transactions involv-ing U.S. real estate. The changes to the scopeof “covered transactions” have resulted inincreased CFIUS jurisdiction. The “closeproximity” definition issued by CFIUS willundoubtedly affect GSA-leased properties and



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other properties with national security-sensitiveU.S. government agencies as tenants. As anaddition to the already existing Federal Acqui-sition Regulation and GSA policy requirementsfor communicating ownership to the govern-ment, expanded CFIUS jurisdiction over realestate transactions will generate additional riskanalysis for foreign-affiliated purchasers offederally leased property.

NOTES:150 U.S.C. § 4565 et seq, available at https://www.g

ovinfo.gov/app/details/USCODE-2015-title50/USCODE-2015-title50-chap55-subchapIII-sec4565.

231 C.F.R. Part 802.331 C.F.R. § 802.212 and § 802.233. Change in a

foreign person’s ownership rights that would affect any

three of the above, or transactions structured to evadeCFIUS jurisdiction are also covered transactions. Seealso, Proposed 31 C.F.R. § 802.211.

431 C.F.R. 802.210.531 C.F.R. § 802.216.631 C.F.R. 802.216(e)(1)-(2).731 C.F.R. § 802.303.831 C.F.R. § 802.304.931 C.F.R. § 802.215.10This rule covers all of the parent companies or in-

dividual shareholders that hold five percent or more vot-ing power or other control over the foreign entity.

11Proposed 31 C.F.R. § 802.214.12Frequently Asked Questions on Final CFIUS

Regulations Implementing FIRRMA, Jan. 13, 2020, avail-able at https://home.treasury.gov/system/files/206/Final-FIRRMA-Regulations-FAQs.pdf.

1331 C.F.R. 802.214; 31 C.F.R. 802.1001.14 https://www.gao.gov/products/GAO-17-195.1548 C.F.R. § 4.18.



14

Real Estate Financing in the HealthcareSpace: Keep Your Eye on the Ball

Ryan C. Craig and Merle M. DeLancey Jr.*

The authors of this article discuss two important developments that could affect alender’s decision whether to finance real estate transactions involving entities andindividuals in the healthcare field.

Recently, there have been two importantdevelopments that could affect a lender’s deci-sion whether to finance real estate transac-tions involving entities and individuals in thehealthcare field. Lenders should be cognizantof these developments and update their duediligence checklists to include these issues.

Advisory Opinion No. 19-05(Purchasing Real Estate from anExcluded Party)

The Department of Health and Human Ser-vices Office of Inspector General (“HHS OIG”or “OIG”) recently issued an advisory opinionregarding the proposed purchase of real estatefrom a company owned and managed, in part,by an excluded individual. The Proposed Ar-rangement involved a community health centerthat receives federal grant funding and ownsand operates community health centers en-rolled in the Medicare program (“HealthCenter”). The Health Center sought to pur-chase the real estate on which one of its com-munity health centers is located. The Company

from which the Health Center sought to pur-chase the property is owned and managed, inpart, by an individual who was excluded fromparticipation in all federal healthcare programsby HHS OIG (“Excluded Person”).

HHS OIG concluded that the Proposed Ar-rangement would not constitute grounds forthe imposition of sanctions against the HealthCenter. The OIG based its decision on theHealth Center’s certifications that it would notsubmit any claims to, or otherwise requestpayment from, any federal healthcare programfor the purchase of the property. Specifically,the Health Center certified that the purchaseof the property would not be:

E Listed in an itemized claim for federalhealthcare program payment or a requestfor payment;

E Included in any federal or state healthcareprogram reimbursement method, such asa prospective payment system or man-aged care system;

*Ryan C. Craig is a partner at Blank Rome LLP representing clients on real estate, finance, and general corporatetransactional matters. Merle M. DeLancey Jr. is a partner at the firm focusing on a wide variety of government procure-ment law, representing clients contracting with federal and state governments, with an emphasis in the healthcareindustry. The authors may be contacted at [email protected] and [email protected], respectively.


15

E Included in any claim based on costs; or

E Included in a cost report, books of ac-count, or other documents supporting aclaim based on costs (whether or notactually entered).

The Health Center also certified that it wouldnot use any federal grant funds to purchasethe property or receive any financing from theCompany or the Excluded Person for thepurchase of the property. Finally, the HealthCenter certified that it would be the soletitleholder of the property and that neither theCompany nor the Excluded Person wouldhave any ongoing relationship—financial,ownership, control, management, or other-wise—with the Health Center after purchaseof the property.

Based on the Health Center’s certifications,the OIG concluded that the Proposed Arrange-ment would not involve the provision of itemsor services for which payment may be madeunder any federal healthcare program, andthe OIG would not subject Requestor toadministrative sanctions under Section1128A(a)(6) of the Social Security Act in con-nection with the Proposed Arrangement.

Assessing Affiliation with an ExcludedParty

The Centers for Medicare and Medicaid Ser-vices (“CMS”) has issued the Program Integ-rity Enhancements to the Provider EnrollmentProcess Final Rule. Among other changes, theFinal Rule adds 42 C.F.R. § 424.519, titled“Disclosure of affiliations.” The Final Ruleexpands CMS’s authority to deny or revokehealthcare providers from participating infederal healthcare programs. The Final Rulerequires federal healthcare providers (Medi-

care, Medicaid, and the Children’s Health In-surance Program) to disclose the individualsand entities with whom they have directly orindirectly affiliated that have “disclosableevents.”

Disclosable events include:

E Suspended or excluded from participa-tion in a federal healthcare program;

E Enrollment denied, revoked, or termi-nated by a federal healthcare program;

E Billing privileges suspended, revoked, ordenied by a federal healthcare program;or

E Uncollected debt (e.g., overpayments,civil monetary penalties, or other assess-ment) to a federal healthcare program.

A healthcare provider is now required to dis-close individuals and entities with which theprovider has or had a direct or indirectaffiliation. Under the Final Rule, “affiliation”includes:

E Direct or indirect ownership of five per-cent or greater;

E General or limited partnership interest,regardless of the percentage;

E Managing employees;

E Officers or directors; or

E Any reassignment relationship under 42C.F.R. § 424.80.

The Final Rule’s focus is to weed out badactors, including individuals who potentially fallthrough the cracks and end up reenrolling in afederal healthcare program. However, the



16

Final Rule could have unintended (or maybeintended) consequences in the context ofcorporate transactions, including real estatefinancing.

Takeaways

Beginning November 4, 2019, lendersneeded to delve deeper into the background,

management, and structure of entities involvedin financing transactions to reach a comfortlevel commensurate with the applicabletransaction. Simply searching federal health-care program exclusion lists is no longersufficient. Lenders should update their due dil-igence checklists to include these issues.

Real Estate Financing in the Healthcare Space: Keep Your Eye on the Ball


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A Loan Trader’s Guide to FIRPTAWithholding and Mixed-Asset Recoveries

Christopher S. Campbell and Charles M. Cole*

The purpose of this article is to assist loan market participants in identifying ForeignInvestment in Real Property Tax Act issues that may arise in connection with loanrestructurings and other purchases of loans and related proceeds of such loans, and tobriefly discuss possible solutions to the Act’s valuation issues in mixed-asset recoveries.

Under The Foreign Investment in Real Prop-erty Tax Act of 19801 (“FIRPTA”), any disposi-tion of a “United States real property interest”2

by a foreign person is subject to income taxwithholding, and the buyer of any such inter-est must deduct and withhold 15 percent fromthe purchase price, subject to any availableexemptions.3 The purpose of this article is toassist loan market participants in identifyingFIRPTA issues that may arise in connectionwith loan restructurings and other purchasesof loans and related proceeds of such loans,and to briefly discuss possible solutions toFIRPTA valuation issues in mixed-assetrecoveries.

“United States Real Property Interest”Defined

A “United States real property interest” (a“USRPI”) is generally defined as an interest inreal property located in the United States.4 Insituations involving the sale of a traditional

real property interest, such as a parcel of land,the applicability of FIRPTA to such a transac-tion is generally a straightforward analysis.However, and more importantly for the purposeof this article, a USRPI may also include aninterest (other than solely as a creditor) in adomestic corporation if such corporation is a“United States real property holding corpora-tion” (a “USRPHC”).5 A USRPHC is defined asa corporation where the fair market value ofits USRPIs equals or exceeds 50 percent ofthe fair market value of its global real propertyinterests and other assets used in a trade orbusiness.6

Exemptions

Even if a non-U.S. seller sells property thatis (or may be) a USRPI, the non-U.S. sellermay, nevertheless, be exempt from withhold-ing under FIRPTA in certain circumstances.For example, FIRPTA withholding would notbe required in connection with the sale by a

*Christopher S. Campbell is an associate at Morrison & Foerster LLP, where he is a member of the Debt TradingGroup, representing investment banks, commercial banks, hedge funds, and other entities in secondary market loantransactions. Charles M. Cole is a partner at the firm representing clients engaged in financial transactions, includingloans, restructurings, and secondary market trading of commercial loans and other debt assets. The authors may becontacted at [email protected] and [email protected], respectively.


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non-U.S. seller of an interest in a domesticcorporation if any class of stock of suchcorporation is “regularly traded” on an “estab-lished securities market,” provided that thenon-U.S. seller did not hold more than 10percent (formerly five percent) of such class ofinterest during the applicable period.7 Thereare several methods of establishing whether amarket is an “established securities market,”and there are two established options fordetermining whether a class of interests is“regularly traded” on such market.

“Established Securities Market”

A market is an “established securities mar-ket” if it is:

E A national securities exchange which isregistered under the Securities ExchangeAct of 1934;

E A foreign national securities exchangewhich is officially recognized, sanctioned,or supervised by a governmental author-ity; or

E An over-the-counter market. An over-the-counter market is any market reflectedby the existence of an interdealer quota-tion system. An interdealer quotationsystem is any system of general circula-tion to brokers and dealers which regu-larly disseminates quotations of stocksand securities by identified brokers ordealers, other than by quotation sheetswhich are prepared and distributed by abroker or dealer in the regular course ofbusiness and which contain only quota-tions of such broker or dealer.

“Regularly Traded”

A class of interests that is traded on an

established securities market is considered tobe “regularly traded” on that market for anyquarter during which it satisfies the followingfour requirements:8

1. Trades in the class are affected in non-deminimis quantities on at least 15 daysduring the calendar quarter;

2. The aggregate number of interests in theclass that are traded during the quarter isat least 7.5 percent of the average num-ber of interests in the class outstandingduring the quarter (or at least 2.5 percent,if the relevant class of interests are heldby 2,500 or more shareholders);

3. At no point during the quarter is 50percent or more of the outstanding inter-ests in the relevant class owned by 100or fewer persons; and

4. In the case of interests traded on foreignsecurities market, certain reporting re-quirements are met.

As an alternative to the methodology above,a class of interests that is traded on anestablished securities market located in theUnited States is also considered to be “regu-larly traded” for any calendar quarter duringwhich it is regularly quoted by brokers or deal-ers making a market in the interests. Forpurposes of this rule, a broker or dealer“makes a market” in a class of interests only ifthe broker/dealer holds itself out to buy or sellinterests in the class at the quoted price.

In addition to the above-referenced exemp-tion, the relevant statute9 provides that FIRPTAwithholding would not be required where:



20

E The seller provides to the buyer an affi-davit stating that it is not a foreign personand certifying to certain other facts; or

E In the case of any interest in a domesticcorporation, the non-U.S. seller obtainsand provides to the buyer an affidavitfrom the domestic corporation, underpenalty of perjury, that such domesticcorporation is not a USRPHC or that aninterest in such corporation is not aUSRPI.

Restructurings and FIRPTAConsiderations

By its nature, FIRPTA is (or should be) asignificant area of focus for sophisticatedforeign shareholders of domestic corporationsthat are USRPHCs, but likely of lesser concernfor domestic U.S. creditors and lenders activein the U.S. markets, whose interests areexpressly excluded under FIRPTA. However,as lenders are keenly aware, in a restructur-ing, lenders may receive a mix of assets inexchange for their claims. As a result, loanmarket participants may sell an interest in aloan, but upon a restructuring of the borrower,such loan market participants may ultimatelyhold a mix of cash, new loans, debt securities,and/or equity securities in exchange for theirclaims related to the original loan.

In the majority of restructurings, FIRPTAdoes not pose an issue for loan market partici-pants looking to sell their mixed-assetrecoveries. First, FIRPTA is only applicable toUSRPIs (including equity ownership in aUSRPHC), and not to cash, debt securitiesand loans. Second, FIRPTA is only applicableto non-U.S. sellers, and not to domesticsellers. Third, as discussed above, an exemp-tion for withholding may be available. However,

if an exemption is not available and the buyeris responsible, on its own, to make a determi-nation that withholding on account of FIRPTAis required for a particular transfer, then it musttake proper steps to effect such withholding inaccordance with its internal policies and ap-plicable law.

The Loan Trading Market

For a variety of reasons, in the loan tradingmarket, loan market participants often agreeto trades of loans that do not settle prior to theeffectiveness of a borrower’s plan of reorgani-zation or restructuring transaction. In somecases, settlement of all pending loan tradesprior to effectiveness is not feasible. In suchcases, as emergence looms, loan marketparticipants should consider whether or notFIRPTA may present an issue for settling apending trade.

There are several avenues of inquiry avail-able for investigating an issuer’s anticipatedFIRPTA status upon emergence, such as anexamination of the borrower’s plan of reorga-nization or disclosure statement, or internaldiscussions with analysts covering theborrower. Also, upon emergence, a foreignholder may request an affidavit from the post-emergence issuer regarding such issuer’sFIRPTA status. If such an investigation revealsthat FIRPTA may pose an issue with respectto pending trades, it may introduce addedincentive on the part of both the buyer and theseller to get a trade settled prior to effective-ness of the restructuring. One approach tosettlement that has been used by buyers ofloans is to prioritize and focus settlement ef-forts on outstanding purchases from non-U.S.sellers prior to emergence, thus eliminating

A Loan Trader’s Guide to FIRPTA Withholding and Mixed-Asset Recoveries


21

the possibility of FIRPTA issues for thosetransactions.

Often, however, a pending trade cannotsettle prior to the effective date of a reorgani-zation despite the efforts of the buyer and theseller, and in such a situation, the buyer andthe seller will generally settle the loan tradevia a proceeds letter substantially in the ap-plicable form published by The Loan Syndica-tions and Trading Association, Inc. (the“LSTA”).

As mentioned above, if the buyer makes adetermination that FIRPTA withholding isrequired, then it should take proper steps tomake a determinative determination and, ifnecessary, effect such withholding in accor-dance with its internal policies and applicablelaw. The ability to withhold in such a situationis expressly permitted by the form of LSTAChapter 11 Plan Proceeds Letter Agreementfor Post-Effective Date Settlement of Dis-tressed Trades currently published by theLSTA, which states that a party may withholdany amount required by law, and that anyamount so withheld shall be treated for allpurposes of the proceeds letter as havingbeen paid by the buyer to the seller. The effectof this should result in the non-U.S. seller’staking responsibility for establishing to the sat-isfaction of the buyer that withholding in notrequired, or to be prepared to accept a pricefor which a portion has been withheld.

FIRPTA Valuation Issues

One complicating factor in the loan tradingmarket, as it relates to FIRPTA, is mixed-assetrecoveries. In a restructuring, lenders mayreceive a mix of assets in exchange for theirclaims. If such a lender entered into a loan

trade pursuant to an LSTA Distressed TradeConfirmation prior to such restructuring, theseller would still have an obligation to settlesuch transaction with its counterparty as it re-lates to the “proceeds” of the loan. A portion ofthe proceeds may consist of cash or debt se-curities, which is expressly excluded fromFIRPTA withholding, but another portion mayconsist of stock in a USRPHC. BecauseFIRPTA withholding is only applicable to theportion of the purchase price that relates tothe equity component of the recovery, a mixed-asset valuation issue arises, and the partiesmust establish the value applicable to suchequity component.

There are varied approaches used to calcu-late the value applicable to the equity compo-nent of a mixed-asset recovery, and such ap-proaches should generally involve asking oneor more of the following key questions:

E Which resources do you use to establishvalue?

E What is the target date for valuation?

E What internal policies, tax or otherwise,must be followed?

E Will a range of values suffice, and if so,how should a point along such spectrumbe chosen?

E Does the trading counterparty agree withyour analysis?

Obviously, the party charged with withholdingmust take responsibility for determining theanswers to all of these questions in a mannerconsistent with the requirements of applicablelaw.



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Conclusion

In conclusion, although interests in loansare expressly excluded from FIRPTA withhold-ing, restructurings with mixed-asset recoveriescan present traps for the unwary loan marketparticipant. A thoughtful, considered approachwell in advance of settlement may allow loanmarket participants to potentially avoid FIRPTAwithholding altogether, or at a minimum, havea valuation protocol in place to allow pendingtrades to settle in the market as efficiently aspossible.

NOTES:126 U.S. Code § 1445.2As defined in 26 U.S. Code § 897(c).326 U.S. Code § 1445(a). Under certain circum-

stances, a seller of U.S. real property that is a non-U.S.person, that is otherwise subject to FIRPTA withholding,may be entitled to reduce or eliminate such withholdingby obtaining from the Internal Revenue Service (the“IRS”) (and providing to the purchaser/payor/withholding

agent) a withholding certificate to such effect. Some ofthe circumstances under which such a withholding certif-icate may be obtained include, among others, where: (i)the selling non-U.S. person’s maximum tax liability isless than the otherwise required withholding; (ii) the sell-ing non-U.S. person is exempt from U.S. tax under atreaty or under the Internal Revenue Code of 1986, asamended, and the rules and regulations promulgatedunder it (the “Code”) (such as certain sales of stock byforeign governmental entities); and (iii) the selling non-U.S. person successfully demonstrates to the IRS thatreduced withholding will not jeopardize the collection oftax due.

426 U.S. Code § 897(c)(1)(A). Under this section, aUnited States real property interest includes any interestin a mine, well, or other natural deposit, and as a result,corporations in the energy sector may qualify as aUSRPHC due to their ownership interests in such assets.The definition of USRPI also includes real propertyinterests in the Virgin Islands.

526 U.S. Code § 897(c)(1)(A)(ii).626 U.S. Code § 897(c)(2).726 U.S. Code § 897(c)(3).8For these requirements, trades between related

persons are disregarded, trades between two personsthat occur several times during a quarter may bedisregarded, and (for the requirement (iii) only) relatedpersons are treated as a single person.

926 U.S. Code § 1445.

A Loan Trader’s Guide to FIRPTA Withholding and Mixed-Asset Recoveries


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Changes to New York Rent RegulationsFace Challenge

Jennifer S. Recine, James L. Bernard, David J. Kahne, and

Patrick N. Petrocelli*

The Housing Stability and Tenant Protection Act of 2019 makes significant changes toNew York’s rent regulation laws, and leading industry groups quickly announced theirintention to mount constitutional challenges to the Act. The authors of this article discussthe Takings and Contract Clauses of the U.S. Constitution, and recent developments inconstitutional jurisprudence that suggest there might be light at the end of an admittedlylong tunnel for property owners who feel the changes to existing law went too far.

Governor Cuomo has signed into law theHousing Stability and Tenant Protection Act of2019. The Act makes significant changes toNew York’s rent regulation laws, and leadingindustry groups quickly announced their inten-tion to mount constitutional challenges to theAct. The first of those lawsuits has alreadybeen filed and others are sure to follow. Abroad facial challenge to the Act will likely relyon the Takings Clause of the U.S. Constitution.And more individualized challenges may alsorely on the Contracts Clause to the extent theAct impairs existing contractual arrangementsbetween building owners and landlords andtheir tenants or between property purchasersand sellers. Based on existing U.S. Supreme

Court and U.S. Court of Appeals for theSecond Circuit precedent, prospective plaintiffscertainly face an uphill battle in seeking toinvalidate all, or portions of, the Act. But recentdevelopments in constitutional jurisprudence,coupled with the fact-specific nature of poten-tial individualized challenges, suggest thatthere might be light at the end of an admit-tedly long tunnel for property owners who feelthe changes to existing law went too far.

The Takings Clause

The Takings Clause prohibits private prop-erty for public use without just compensation.1

The government can “take” private propertywithin the meaning of the Takings Clause in

*Jennifer S. Recine ([email protected]) is a partner at Stroock & Stroock & Lavan LLP handling complex realestate disputes, civil RICO and other securities actions, and professional malpractice, tax and other high-stakes mat-ters. James L. Bernard ([email protected]) is a partner at the firm focusing on financial services and general com-mercial litigation, including securities and consumer class actions, commodities and derivatives, audit malpractice andrelated issues, and white-collar criminal defense. David J. Kahne ([email protected]) is special counsel at the firmhandling all aspects of civil litigation in federal and state court and in investigations before federal and state regulatoryagencies. Patrick N. Petrocelli ([email protected]) is special counsel at the firm representing institutions andindividuals in federal and state court, arbitrations, and government investigations.


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one of three ways: it can (1) effect a perma-nent physical occupation of property; (2)deprive an owner of all economically benefi-cial uses of the property; or (3) regulate prop-erty to such a degree that it amounts to a “tak-ing” requiring just compensation. Any TakingsClause challenge to the Act likely will focus onthis third category, commonly referred to as a“regulatory taking.”2 Any regulatory takingsclaim will be analyzed under the “Penn CentralTest,” based on the Supreme Court’s 1978 de-cision in Penn-Central Transportation Co. v.City of New York.3

The Penn Central test involves an ad hocinquiry into the factual circumstances of eachparticular challenge. In practice, however,courts applying the test focus their analysis onthree “factors” identified in Penn Central: (1)“[t]he economic impact of the regulation on the[property owner]”; (2) “the extent to which theregulation has interfered with distinctinvestment-backed expectations”; and (3) “thecharacter of the governmental action.”4 UnderPenn Central, therefore, prospective plaintiffsseeking to challenge New York’s new rent lawas a regulatory taking will need to:

E Clearly articulate concrete and significantharm to their business interests causedby the Act;

E Demonstrate that they made their initialinvestments because they subjectivelyexpected to receive benefits from theirinvestments that were objectively reason-able at the time but subsequently deniedor restricted by the Act; and

E Convincingly show that the challengedprovisions of the Act are more akin to theState forcing private property owners to

bear the burden of providing affordableand stable housing under circumstancesin which that burden should be shared bythe public generally.

First, for a court to find that the economicimpact of the Act supports a finding that aregulatory taking occurred, prospective plain-tiffs will need to show that the impact is signif-icant to the value of the property as a whole.Courts have consistently observed that aneconomic impact in the 20–50 percent rangeis not significant enough to constitute a taking.5

In one case, a diminution in value of 92.5percent was found to be insufficient to consti-tute a regulatory taking.6 Still, in finding that ataking had occurred, another court took a moreinvestment-minded approach by comparingthe rate of return plaintiffs received on theirproperties with the challenged regulations inplace to a hypothetical rate of return theyotherwise could have enjoyed absent theregulations. But, even in that case, the dif-ferential on the rate of return equated to a lossof approximately 96 percent (0.3 percentcompared to 8.5 percent), and the same courtsubsequently clarified that the analysis mustconsider the effect on the property as a whole.7

Second, for the “investment-backed expec-tations” factor, courts are typically deferentialto broad exercises of governmental authority,pa rticularly in cases where the governmentacts in industries, like real estate, that alreadyare highly regulated. In those industries, courtshave reasoned, market participants are awarethat regulatory regimes exist and generallymust take into account potential changes inthe law when making investment decisions.8

To overcome this general principle, potentialplaintiffs will significantly increase theirchances of success if they can show some-



26

thing unique about their situations that madethe Act’s changes to the law unforeseeable,as least as applied to them.9

Third, in assessing the “character of thegovernment action,” courts must decidewhether “the interference with property can becharacterized as a physical invasion by thegovernment,” which supports a finding of a tak-ing, or whether the “interference arises fromsome public program adjusting the benefitsand burdens of economic life to promote thecommon good,” which does not.10 Prospectiveplaintiffs should be prepared to show that theyare being singled out to bear burdens thatought to be shared by the public. Here, dem-onstrating that the Act singles out landlords isunlikely to be enough because it would under-mine, wholesale, existing law upholding rentcontrol laws. To avoid the automatic applica-tion of prior rent control rulings, prospectiveplaintiffs should, to the extent possible, attemptto distinguish their situations by, for example,articulating how the Act places burdens onthem that are unique and therefore distinctfrom the burden rent control places on land-lords generally.11

This analysis, of course, assumes that cur-rent regulatory takings jurisprudence remainsin place. Potential plaintiffs considering abroad challenge to the Act generally may beproceeding with the hope that a conservative-majority on the Supreme Court will revisit itsprior precedent, and impose more stringentstandards on the state’s ability to enact rent-control measures without paying property own-ers just compensation. There is some reasonfor optimism, in light of the Court’s recent rul-ing in Knick v. Township of Scott.12 In Knick, afive-to-four majority overruled a 34-year-oldprecedent that required property owners to first

seek, and be denied, just compensation instate court before they could sue in federalcourt. Knick is procedurally significant for chal-lenges to the Act because they can now filesuit directly in federal court. But, more impor-tantly, Knick signals the Court’s willingness torevisit prior takings opinions. The Court’s con-servative majority could revisit Penn Centralor otherwise expand the circumstances inwhich governments will be required to pay justcompensation to private property owners tocover certain of the more draconian aspects ofthe Act.

The Contracts Clause

A separate constitutional challenge to theAct could be brought under the ContractsClause. Article 1, Section 10 of the U.S. Con-stitution provides that “[n]o State shall . . .pass any . . . law impairing the Obligation ofContracts.”13 While the origins of the clause liein protection from state legislative interferencein the ability of debtors to obtain relief fromcreditors after the Revolutionary War, it haslong been interpreted to safeguard the sanctityof all contractual obligations, public and privatealike, from interference by the government andto promote confidence in the stability of con-tractual obligations.14 The constitutional protec-tion ensures that the suspension of contractrights by the State is a rare exception doneunder limited circumstances.

After decades of relative dormancy and non-use, Contracts Clause litigation is more active.The resurgence is due in part to state and lo-cal efforts to legislate changes to retirementschemes and other terms of employment, asmunicipalities confront an epidemic of un-funded pension obligations. Last year, theSupreme Court decided a Contracts Clause

Changes to New York Rent Regulations Face Challenge


27

case involving Minnesota’s legislative interven-tion in life insurance policies. In Sveen v. Me-lin,15 the Court held that Minnesota’s statuteproviding that divorce automatically revokes aprior beneficiary designation on a life insur-ance policy was not a “substantial impairment”because divorcees do not typically want tomaintain their former spouse as a beneficiaryand to re-establish prior intent by simply re-executing another beneficiary designation formwas merely a “paperwork obligation” that doesnot violate the Contracts Clause. The SupremeCourt’s decision to take up the case showsthe increased willingness examine the rel-evance of the Contracts Clause.

The basic contours of the Contracts Clauseanalysis are well-established. Although theConstitution’s language is facially absolute—“no state shall pass any law”—the clause hasbeen interpreted not to trump the police powerof the state to protect the general welfare ofits citizens. Thus, a state law that impairs anobligation under a contract does not necessar-ily give rise to a Contracts Clause claim.16

To determine if a law treads impermissiblyon contract rights, courts have historicallyemployed a three prong test: (1) is the contrac-tual impairment substantial; (2) does the lawserve a legitimate public purpose such asremedying a general social or economic illand, if such a such a purpose is demonstrated;(3) are the means chosen to accomplish thepurpose reasonable and necessary under thecircumstances. But, last year, the SupremeCourt re-articulated the test as a two-prongedone: (1) whether the state law has operatedas a substantial impairment of a contractualrelationship and (2) whether the state law isdrawn in an “appropriate” and “reasonable”way to advance “a significant and legitimate

public purpose,” but the substance of the anal-ysis remains the same.17

The prongs of the test are not viewed inisolation. The severity of the impairment typi-cally dictates the level of scrutiny the legisla-tion will receive—the more substantial thedisruption of a contractual relationship, themore exacting the scrutiny. Heighted scrutinyalso is applied to legislation in where thelegislation impairs the government’s owncontracts. And, conversely, a more relaxedreview is applied when the government is nota party to the abrogated contract.

Because the Legislature’s attempt to rem-edy affordable housing in New York wouldlikely be deemed a “legitimate public purpose,”the focus of any Contracts Clause challengeto the rent regulations would then focus on theother elements of the analysis.

On the first prong, to assess whether animpairment is substantial, courts look to the“extent to which reasonable expectationsunder the contract have been disrupted.”18

Impairments that go to the heart of a contractand that affect the core terms upon which theparties have reasonable relied or that signifi-cantly altered the duties of the parties underthe contracts are substantial. Typically, if a lawcompletely destroys contractual expectations,a severe impairment exists, but if a law onlyrestricts a party from gains it reasonablyexpected from the contract, no substantialimpairment exists.19

Where an industry or field of activity is heav-ily regulated — like the landlord-tenant space-courts are less likely to find that reasonableexpectations have been disrupted.

Whether the rent regulations operate as a



28

substantial impairment will largely depend onthe individual contract that is impaired. Courtsaround the country have found that restric-tions on the establishment of rent are substan-tial impairments. But courts have also beenless inclined to apply strict scrutiny to rentregulations, even if there is a substantialimpairment, in light of the highly regulatednature of the landlord-tenant relationship.

For an impairment to be “reasonable andnecessary,” it must be shown that the state didnot (1) consider impairing contracts on par withother policy alternatives; or (2) impose adrastic impairment when an evident and moremoderate course would serve its purposeequally well, nor (3) acted unreasonably inlight of the surrounding circumstances. A lawthat works a substantial impairment of acontract must be tailored to meet the societalill it is designed to ameliorate.

Here, any challenge to the Act would likelyinvolve an analysis of whether the rent regula-tions were reasonable and necessary underthe circumstances. In making this determina-tion, courts typically look to whether there is arecord or showing that less drastic alternativeswere actually considered, investigated andcompared by the Legislature. Courts alsoconsider whether the act was an emergencymeasure, was one to protect a basic societalinterest, rather than particular individuals, andwas limited to the duration of the emergency.

A claim challenging the rent regulationscould make similar points to the ones made inHarmon v. Markus,20 the most recent ContractsClause challenge to a New York rent stabiliza-tion law. There, plaintiffs argued that the Cityand State had many other effective options toaccomplish the proffered purpose of a rent

stabilization law, including public housing, Sec-tion 8 housing, tax incentive and subsidizedrent. In Harmon, the court never reached theavailability of other non-contract impairingalternatives because it found plaintiff’s contracthad not been substantially impaired. Here, anylitigant with success demonstrating the rentregulations operate a “substantial impairment”to its own contracts could point to the sametypes of alternative measures as less draco-nian options never seriously considered.

Any Contracts Clause challenge would haveto focus on the other, more moderate alterna-tives available to the Legislature and its failureto properly investigate those routes. The chal-lenge would have to overcome a likely deferen-tial review of the Legislature’s attempt toameliorate affordable housing issues in theState and would have to frame the issue asone in which the Legislature acted out of “po-litical expediency,” rather than genuine andnecessary state-wide need.

Conclusion

In sum, recent cases in the Supreme Courtalong with the current composition of the Courtallow for some modest optimism for general-ized challenges to the Act. Ultimately, however,the most successful litigations are likely to bemore fact specific challenges, ones in whichlandlords or property owners have sufferedsignificant economic loss, unique burdens orhave had their reasonable expectations underexisting contracts fundamentally underminedor destroyed by the changes to the law.

NOTES:1U.S. Const. art. 1 § 5.2In 2011, the Second Circuit summarily rejected a

Changes to New York Rent Regulations Face Challenge


29

Takings Clause claim challenging New York’s then-existing rent stabilization laws as a permanent physicaloccupation of property. See Harmon v. Markus, 412 Fed.Appx. 420 (2d Cir. 2011).

3Penn Cent. Transp. Co. v. City of New York, 438U.S. 104, 98 S. Ct. 2646, 57 L. Ed. 2d 631, 11 Env’t.Rep. Cas. (BNA) 1801, 8 Envtl. L. Rep. 20528 (1978).

4Penn Cent. Transp. Co. v. City of New York, 438U.S. 104, 124, 98 S. Ct. 2646, 57 L. Ed. 2d 631, 11 Env’t.Rep. Cas. (BNA) 1801, 8 Envtl. L. Rep. 20528 (1978).

5See CCA Associates v. U.S., 667 F.3d 1239, 1246(Fed. Cir. 2011) (holding that an “18% economic impact”on the value of the owner’s property was “[in]sufficientlysubstantial to favor a taking,” and observing that it was“aware of no case in which a court has found a takingwhere diminution in value was less than 50%”).

6See Colony Cove Properties, LLC v. City of Carson,888 F.3d 445, 451 (9th Cir. 2018), cert. denied, 139 S.Ct. 917, 202 L. Ed. 2d 645 (2019) (“[W]e have observedthat diminution in property value because of governmentregulation ranging from 75% to 92.5% does not consti-tute a taking.”).

7See Cienega Gardens v. U.S., 331 F.3d 1319,1342–43, 33 Envtl. L. Rep. 20221 (Fed. Cir. 2003);Cienega Gardens v. U.S., 503 F.3d 1266, 1280–82 (Fed.Cir. 2007).

8See Colony Cove Properties, LLC v. City of Carson,888 F.3d 445, 453 (9th Cir. 2018), cert. denied, 139 S.Ct. 917, 202 L. Ed. 2d 645 (2019) (“As a general matter,an investor must account for ‘the burdens of rent control’in its expectations about future increased rentalincome.”).

9See Cienega Gardens v. U.S., 331 F.3d 1319, 1353,33 Envtl. L. Rep. 20221 (Fed. Cir. 2003) (regulatory tak-ings found in case where (1) governing statutes gaveplaintiffs the right to repay federally advantaged loans af-

ter 20 years and thereby exit program that required themto agree to certain rent restrictions; (2) plaintiffs’ loanagreements incorporated their right to repay loans; and(3) Congress amended statutes to remove plaintiffs’ rightto repay loans).

10Penn Cent. Transp. Co. v. City of New York, 438U.S. 104, 124, 98 S. Ct. 2646, 57 L. Ed. 2d 631, 11 Env’t.Rep. Cas. (BNA) 1801, 8 Envtl. L. Rep. 20528 (1978).

11See Cienega Gardens v. U.S., 331 F.3d 1319,1339, 33 Envtl. L. Rep. 20221 (Fed. Cir. 2003) (changein the law was not “industry-wide” because it only ap-plied to sub-class of landlords that had voluntarilyentered affordable housing program with reasonableexpectation that they would be able to exit the programafter 20 years based on existing law that was incorpo-rated into their loan agreements).

12Case No. 17-647, Slip. Op. (June 21, 2019).13U.S. Const. art. 1 § 10.14U.S. Trust Co. of New York v. New Jersey, 431

U.S. 1, 15, 97 S. Ct. 1505, 52 L. Ed. 2d 92 (1977).15Sveen v. Melin, 138 S. Ct. 1815, 201 L. Ed. 2d

180, 2018 Employee Benefits Cas. (BNA) 205361 (2018).16U.S. Trust Co. of New York v. New Jersey, 431

U.S. 1, 16, 97 S. Ct. 1505, 52 L. Ed. 2d 92 (1977).17Sveen v. Melin, 138 S. Ct. 1815, 1822, 201 L. Ed.

2d 180, 2018 Employee Benefits Cas. (BNA) 205361(2018).

18Sanitation and Recycling Industry, Inc. v. City ofNew York, 107 F.3d 985, 992–93 (2d Cir. 1997).

19Energy Reserves Group, Inc. v. Kansas Powerand Light Co., 459 U.S. 400, 103 S. Ct. 697, 74 L. Ed.2d 569, 50 Pub. Util. Rep. 4th (PUR) 489 (1983).

20Harmon v. Markus, 412 Fed. Appx. 420 (2d Cir.2011).



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Treasury and HUD Propose HousingFinance Reforms

Dwight C. Smith*

The Treasury Department and the Department of Housing and Urban Development havereleased complementary proposals that, if implemented, would result in extensive changesto federal regulation of housing finance. The author of this article explains the proposals,which include well over 100 recommendations for legislative and regulatory changes.

The Treasury Department (“Treasury”) andthe Department of Housing and Urban Devel-opment (“HUD”) have released complementaryproposals that, if implemented, would result inextensive changes to federal regulation ofhousing finance. The plans respond to a Pres-idential Memorandum1 of March 27, 2019,directing Treasury and HUD to develop hous-ing reform proposals consistent with the goalsthat the memorandum sets out.

Among other things, under the TreasuryPlan,2 Fannie Mae and Freddie Mac (twogovernment-sponsored enterprises or “GSEs”)would be recapitalized by the private sector,leave their conservatorships, and have morelimited powers in the mortgage market. TheGSEs would be re-chartered with a charter is-sued by the Federal Housing Finance Agency(“FHFA”), the agency that now oversees andacts as conservator for the GSEs. This charterwould also be available to other guarantors ofmortgage-backed securities (“MBS”). The planrecommends that the implicit guarantees ofthe GSEs be replaced by an explicit paid-for

guarantee from Ginnie Mae of the repaymentof principal and interest on qualifying MBS col-lateralized by eligible mortgage loans. GinnieMae, a government corporation within HUD,already provides such a guarantee to MBScollateralized by affordable loans issued undervarious government programs.

The HUD Plan3 urges that the Federal Hous-ing Administration (“FHA”) be restructured asan autonomous government corporation withinHUD and that FHA’s various programs berevised in several respects.

The two plans include well over 100 recom-mendations for legislative and regulatorychanges. While several of the proposals wouldrequire Congressional action, many may beeffected through rulemaking or other agencyaction. Whatever the form in which the pro-posed changes are implemented, the recom-mendations are complex, and the impact ofthe changes will very much depend on theparticulars of new legislation or regulation.

*Dwight C. Smith III is of counsel at Covington & Burling LLP focusing his practice on bank regulatory and compli-ance, corporate, and consumer finance matters. He may be contacted at [email protected].


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The Treasury Plan

The Treasury Plan focuses on the GSEs andFHFA. The plan fleshes out four goals statedin the Presidential Memorandum:

1. Ending the GSE conservatorships;

2. Facilitating competition in the housingfinance market;

3. Enhancing regulation of the GSEs; and

4. Providing appropriate compensation tothe federal government for the support itprovides to the secondary housing fi-nance market.

The legislation that Treasury has proposedwould require recapitalization and re-charteringof the GSEs together with termination of theconservatorships. The legislation would re-place the support for the GSEs in the SeniorPreferred Stock Purchase Agreements(“PSPAs”) with an explicit paid-for guaranteefrom Ginnie Mae of the timely payment ofprincipal and interest on qualifying MBS. Thisnew guarantee would be available, subject toapproval by the FHFA, to other guarantors ofMBS that are collateralized by eligible singlefamily or multifamily mortgage loans. Thelegislation would require the payment of feesto the federal government for the full-faith-and-credit guarantee.

The GSEs and other guarantors would besubject to risk-based and leverage capital onan economic par with capital requirements forother participants — e.g., banks — in themortgage industry. (FHFA has already pro-posed capital requirements, but these differfrom the recommendations in the TreasuryPlan.) The legislation additionally would re-quire the GSEs and other guarantors to main-

tain a nationwide cash window through whichsmall lenders could sell loans for cash, andthe GSEs and guarantors would be prohibitedfrom offering volume-based pricing discountsor other incentives. The GSEs have alreadyopened cash windows and adhere to a no-discount standard.

Many of these reforms could be imple-mented through agency action. While theimpact on the industry would be less than thatof legislative changes, it still would beconsiderable. There are at least two entrypoints for change, which enable Treasury andthe FHFA to take a wide range of administra-tive actions: FHFA acts both as regulator andconservator of the GSEs (which have been inconservatorship since 2008), and the PSPAs(through which Treasury has provided financialsupport to the GSEs) contain several restric-tions on the GSEs’ business. For example,FHFA in its capacity as conservator couldagree with Treasury on extensive amendmentsto the PSPAs without any involvement by theboards or management of the GSEs.

Even without Congressional action, theconservatorships could be terminated, theGSEs recapitalized, and greater restrictionsimposed through amendment of the PSPAs.FHFA also could substantially revise thecapital rules that it already has proposed. Ei-ther FHFA or Treasury through an amendmentto the PSPAs could commit the GSEs toestablishing cash windows and providing equalsecondary market access to all lenders.However, other changes would require legisla-tion, including a new charter for the GSEs (andothers) and a Ginnie Mae explicit full-faith-and-credit guarantee.

The Treasury Plan also addresses the “QM



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patch,” a provision in the ability-to-repayregulation of the Consumer Financial Protec-tion Bureau (“CFPB”) that presumes that ahome mortgage eligible to be purchased orguaranteed by a GSE is in compliance withthe ability-to-repay rule. Under the CFPBregulations, the QM patch is set to expire onJanuary 10, 2021. The Treasury Plan supportsthe expiration but also recommends a newbright line safe harbor that would be availableto all qualifying loans regardless of their GSEeligibility.

The HUD Plan

In its housing finance role, HUD is involvedwith two entities, the Federal Housing Adminis-tration (“FHA”) that is part of HUD’s Office ofHousing and that supports a wide range of af-fordable mortgage loans, and Ginnie Mae, acorporation within HUD that guarantees thetimely payment of principal and interest onqualifying MBS backed by eligible affordablehousing loans. These loans include not onlyFHA loans but also loans made through pro-grams of the Veterans Administration and theAgriculture Department.

The HUD Plan addresses three goals statedin the Presidential Memorandum: (i) refocus-ing FHA and GNMA on their primary responsi-bility to provide housing finance support to low-and moderate-income families that cannot befulfilled through traditional underwriting; (ii)improved risk management, and (iii) modern-ization of the operations and technology ofFHA and Ginnie Mae.

The HUD Plan also discusses and proposesreforms that cover six items identified in thePresidential Memorandum:

1. The plan includes several changes to

FHA’s reverse mortgage program, theHome Equity Conversion Mortgage pro-gram (“HECM”), in order to improve itsfinancial viability;

2. The plan considers the risks and benefitsof assistance to first-time homebuyers,including down payment assistance, andsuggests changes;

3. The plan considers the appropriate roleof FHA in multifamily mortgage finance;

4. The plan recommends diversification ofFHA lenders by permitting registered de-pository institutions to participate;

5. The plan proposes enhancements to therequirements and standards for participa-tion in the Ginnie Mae program; and

6. The plan includes reforms to reduceabusive and unsound loan origination orservicing practices for loans in the GinnieMae program.

The HUD Plan additionally recommends re-chartering FHA as an autonomous governmentcorporation within HUD and calls for additionalcapital reserves in the Mutual Mortgage Insur-ance Fund (“MMIF”).

As with the Treasury Plan, a comprehensivestatute would have a significant impact on theways in which affordable housing loans aremade and sold into the secondary market.HUD could affect many of the same resultsthrough rulemaking and guidance, however.Indeed, the explicit guarantee for Ginnie Maeand the re-chartering of FHA are the only ma-jor items that appear to require legislation.Legislation would also be necessary to amendexisting statutory provisions that deal withspecific aspects of affordable loans and FHA

Treasury and HUD Propose Housing Finance Reforms


33

operations. Without legislation, HUD maymake changes to the terms and conditions ofFHA loans, impose new requirements forparticipating lenders, and adopt higher risk-based capital requirements for the MMIF. All ofthe recommended changes for Ginnie Mae’smanagement of counterparty risk and itssecuritization platform may be implementedadministratively. HUD also may make certainchanges to the HECM program, but a robust

reform of the program would requirelegislation.

NOTES:

1 https://www.govinfo.gov/content/pkg/FR-2019-04-01/pdf/2019-06441.pdf.

2 https://home.treasury.gov/system/files/136/Treasury-Housing-Finance-Reform-Plan.pdf.

3 https://www.hud.gov/sites/dfiles/Main/documents/Housing-Finance-Reform-Plan0919.pdf.



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Get a Grip on the Cash-Conversion Cycleby Optimizing the Customer Journey

Shamir Duverseau*

Today, marketing plays an ever-increasing role in shortening the cash conversion cycleas real estate marketers look to develop and optimize digital strategies and touch points inthe customer’s considered purchase journey. The author of this article describes a processby which real estate marketing can be improved.

Cash flow — it impacts the bottom line inany business and real estate is no excpetion.Real estate developers leverage significantamounts of cash when building, developing, orrenovating — whether through financing,partnerships, or construction loans. Realestate projects take anywhere from one tothree years (or more) to come to fruition.Therefore, once the development is nearingcompletion, it is imperative to significantly ac-celerate incoming cash flow and shorten thecash conversion cycle (“CCC”).

The economics of real estate finance arepretty simple: CCC is the time, measured indays, it takes to convert investments in inven-tory and other resources into cash flows fromsales. Shortening the CCC means you aremore effective at developing, bringing in reve-nue, and ultimately in meeting commitmentsto partners, banks, and loan providers.

Today, marketing plays an ever-increasingrole in shortening the CCC as real estatemarketers looking to develop and optimizedigital strategies and touchpoints in the cus-

tomer’s considered purchase journey. Thisjourney, a complex buying decision with a highdegree of financial and/or emotional risk andreward, requires meaningful investigation andcomparison by key decision makers andinfluencers prior to a sale — taking anywherefrom months to years.

What Worked Before Won’t Work Now

Historically, marketing for the consideredpurchase in real estate focused on selling.Period. The old school Mad Men era — “youcan sell anything to anyone sales” approach— involved high pressure and manipulativesales techniques. Cookie-cutter marketingprograms faithfully relied on print and outdooradvertising with a heavy dose of outboundcalling.

Over the last 30 years, however, consumershave become more educated and discerning,which has driven marketers to be more intel-ligent about segmenting the consumer andmeeting those segment needs. Marketing to

*Shamir Duverseau is co-founder and managing partner of Smart Panda Labs, a digital consultancy.


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consumer segments typically involves tradi-tional batch marketing tactics such as:

E Digital advertising;

E Website and landing pages;

E Email blasts;

E Monthly reports; and

E Newsletters.

If this laundry list of marketing programs looksfamiliar — you are not alone. But, considerthis — nearly 84 percent of all consumers usethe internet as part of their decision makingwhen it comes to making a purchase. Today,marketing segmentation and batch tactics justdo not cut it and are being eclipsed by person-alized marketing in which the consumer is incontrol, requiring marketers to focus on one-to-one products — matching the consumerwith the product. To really understand the pathto the considered purchase, marketers mustdecipher data that span customer journeys,channels, and campaigns. And too manymarketers lack the one single thing thattransforms the cross-channel personalizationproblem into an opportunity — a digitalstrategy.

Successful marketing strategies are built ondata-driven personalized experiences thatgenerate trust between a company and itsconsumers. Today, the savvy real estatemarketer must strive to enhance and optimizetheir customers’ journeys with in-the-momentstrategies and tactics that span targetedsearch campaigns, testing and personaliza-tion, customer email journeys, and digitalanalytics and business intelligence.

Real estate developers should take their cue

from some of the world’s biggest brands whendeveloping digital strategies to optimize theircustomers’ considered purchase journey. Inthe words of one Amazon executive, “Ourinvestments are motivated by customer focusrather than by reaction to competition. Wethink this approach earns more trust withcustomers and drives rapid improvements incustomer experience.”

The Considered Purchase — It’sPersonal and It’s a Journey

A real estate purchase is undoubtedly thedefinition of the considered purchase in whicheconomics and emotions have equal bearingon decision making. To ensure that real estatemarketing initiatives are built on this premise,requires firms to:

1. Acquire the right prospects at the righttime to maximize return on ad spend.

2. Use data to communicate to prospects ina personal way, which will increase theirmotivation to convert into customers.

3. Develop a relationship with both pros-pects and customers based on theirneeds, which builds trust and loyalty.

4. Monitor data and analyze it for insightsthat can be used to improve the ROI oncampaigns, websites, mobile apps, andcommunications.

These goals can be achieved through data-driven and personalized digital marketingstrategies that integrate targeted digital mar-keting, digital experience optimization, cus-tomer relationship management, and digitalanalytics and business intelligence. Theresults can be transformative.



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To meet these goals one must be rooted initerative examinations of activities aroundcustomer acquisition, conversion, andretention. First, consider a comprehensivedata audit in which performance metrics, suchas cost per conversion (“CPC”), click throughrate (“CTR”), and cost per acquisition (“CPA”)are examined. This audit can also examinethe user experience (i.e., exit rates, returnfrequency, calls-to-action), and data hygieneand engagement metrics. Through this audit,insights can be gleaned on the effectivenessof the firm’s acquisition and conversion ratesalong with customer-relevant data accuracy.Using these findings, a digital strategy that ad-dresses prospect and customer can be craftedutilizing the following:

Acquisition with a campaign focused onkeywords that matched prospect intent while

prioritizing and educating the firm’s IT depart-ment on issues most impacting search engineoptimization.

Conversion through newly designed anddeveloped landing pages with focused contentcombined with A/B-tested language to bettermeet prospect expectations.

Retention/Communication in which the firm’sdatabase is cleansed to map key attributes torecords; and leverage data feeds to collect alldata in single system.

The Result

The ideal result will be improved cash flowand shortened CCC while building customerloyalty and trust and as the saying goes —that’s priceless.

Get a Grip on the Cash-Conversion Cycle by Optimizing the Customer Journey


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SEC Grants No-Action Relief Relating toStatus of Certain Mortgage Servicing

Rights and Cash Proceeds Under Section3(c)(5)(C) of the Investment Company Act

J. Gerard Cummins, Jason A. Friedhoff, Brian M. Kaplowitz, and

Andrew M. Friedman*

This article discusses a no-action letter issued by the U.S. Securities and ExchangeCommission to a mortgage finance real estate investment trust, which may make it easierfor certain entities to satisfy the asset composition test required by the Commission staffin its interpretation of Section 3(c)(5)(C) under the Investment Company Act of 1940 inrespect of their holdings of certain mortgage servicing rights and cash proceeds.

The Division of Investment Management ofthe U.S. Securities and Exchange Commis-sion (“SEC”) issued to Redwood Trust, Inc., amortgage finance real estate investment trust(“REIT”), a no-action letter1 (the “Redwood No-Action Letter”). The Redwood No-Action Lettermay make it easier for certain entities to satisfythe asset composition test required by theSEC staff (the “Staff”) in its interpretation ofSection 3(c)(5)(C) under the Investment Com-pany Act of 1940 in respect of their holdings ofcertain mortgage servicing rights (“MSRs”) andcash proceeds. The Staff also continued itstrend of granting principles-based relief in the

context of Section 3(c)(5)(C) and expandingthe assets that satisfy the asset compositiontest by focusing on their indicia of engaging ina real estate finance business.

Background

Section 3(c)(5)(C) is an exception fromregistration for entities “primarily engaged in,”among other things, “purchasing or otherwiseacquiring mortgages and other liens on andinterests in real estate” (the “Real EstateException”). In order for an entity to be eligiblefor the Real Estate Exception, (1) at least 55

*J. Gerard Cummins ([email protected]) is a partner at Sidley Austin LLP focusing on securities offerings,corporate matters and funds, with an emphasis on real estate-related transactions, primarily real estate investmenttrusts and real estate funds. Jason A. Friedhoff ([email protected]) is a partner at the firm representing both issuersand underwriters of publicly and privately offered equity and debt securities by real estate investment trusts, includinginitial public offerings. Brian M. Kaplowitz ([email protected]) is a partner at the firm handling a variety of transac-tions and offerings by mutual funds and closed-end investment companies, and representing independent trustees.Andrew M. Friedman ([email protected]) is an associate at the firm practicing in the investment manage-ment area.


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percent of its assets must be comprised of as-sets that are closely connected to real estatesuch as whole mortgage loans, fee interests,leases and, depending on certain features,B-Notes and mezzanine loans (“QualifyingReal Estate Assets”), (2) an additional 25percent of its assets must either be comprisedof Qualifying Real Estate Assets or certain as-sets that are more loosely connected to realestate (“Real Estate-Related Assets”), and (3)the remaining 20 percent of its assets do notneed to be real-estate-related (“MiscellaneousAssets”).

In reviewing an entity’s eligibility for the RealEstate Exception, the Staff historically con-ducted an asset-based analysis that focusedsolely on the characteristics of a particular as-set to determine whether the asset should beconsidered a Qualifying Real Estate Asset,Real Estate-Related Asset or MiscellaneousAsset. In order for an asset to be considered aQualifying Real Estate Asset, the Staff hasgenerally required that the asset represent anactual interest in real estate or be fully securedby real estate.

In response to the evolution of financingtechniques in the real estate finance business,the Staff offered an alternative to the asset-based analysis in certain circumstances In ano-action letter2 issued to Great Ajax FundingLLC (February 12, 2018) (“Great Ajax No-Action Letter”), the Staff stated that a realestate finance company that acquires assetsin the normal course that are not Section3(c)(5)(C) assets may still be able to rely onthe Real Estate Exception if the company’sbusiness activities (e.g., assets, incomesources, historical development, public repre-sentations and the activities of its officers,directors and employees (and other relevant

factors)) “indicate that the issuer is primarilyengaged in the real estate finance business.”

In the Great Ajax No-Action Letter, based onthe business activities analysis, the Staffstated that securities of a securitization trustthat a company received in exchange formortgage loans (made or acquired by the par-ent company and transferred into the trust toobtain financing to acquire additional mortgageloans) should be treated as Qualifying RealEstate Assets because the “securities [were]acquired as a direct result of the . . . busi-ness of purchasing or otherwise acquiringwhole mortgage loans.” Under the traditionalasset-based analysis, a security of anotherentity engaged in the real estate business gen-erally had not constituted a Qualifying RealEstate Asset because it would not have beenconsidered an actual interest in real estate.

The Redwood No-Action Letter

In the Redwood No-Action Letter, the Staffindicated that under the 1940 Act:

a) An entity may treat cash proceeds fromasset dispositions as Qualifying Real EstateAssets or Real Estate-Related Assets if, priorto such dispositions, such assets were them-selves Qualifying Real Estate Assets or RealEstate-Related Assets, respectively. (Underthe facts of the Redwood No-Action Letter,cash proceeds derived from principal amortiza-tions, interest payments and payoffs or fromthe sale of whole mortgage loans generallywould be treated as Qualifying Real EstateAssets, and cash proceeds derived fromprincipal amortizations, interest payments andpayoffs or from the sale of certain MBS gener-ally would be treated as Real Estate-RelatedAssets.)



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b) An entity may treat MSRs as QualifyingReal Estate Assets if the MSRs relate to mort-gages initially owned (whether originated oracquired) by the entity but retained upon thesale of the underlying mortgages.

With respect to the MSRs, the Staff notedthat relief was being provided pursuant to theGreat Ajax No-Action Letter business activitiesanalysis and that its position was limited toMSRs retained upon the sale of mortgages,as opposed to MSRs that were otherwiseacquired from an unaffiliated third party.

The Staff also qualified the relief grantedwith respect to cash proceeds. The relief ap-plies only: (i) for a “temporary” period of up to12 months from receipt, and (ii) if such pro-ceeds are invested in “cash items” as definedby Section 3(a)(1)(C) of the 1940 Act and Rule3a-1 under the 1940 Act. The SEC has inter-preted “cash items” to include:

E Cash;

E Coins;

E Paper currency;

E Demand deposits with banks;

E Timely checks of others;

E Cashier checks;

E Certified checks;

E Bank drafts;

E Money orders;

E Travelers’ checks;

E Letters of credit; and also generally toinclude

E Money market funds.

NOTES:1 https://www.sec.gov/investment/redwood-trust-

081519-3c5.2 https://www.sec.gov/divisions/investment/noaction/

2018/great-ajax-funding-021218-3c5.htm.

SEC Grants No-Action Relief Relating to Status of Certain Mortgage Servicing Rights andCash Proceeds Under Section 3(c)(5)(C) of the Investment Company Act


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FHA Deal Accelerators: Embrace theBureaucracy

Jim Provenzale*

In your quest to minimize the time between firm commitment and closing, your relation-ship with HUD counsel plays a critical role. This article offers practical tips for managingthat relationship, making the HUD attorney’s life easier and boosting the speed of reviewso you can quickly close the deal.

In conversations with lenders, borrowers,and attorneys about closing loans through theU.S. Department of Housing and Urban Devel-opment (“HUD”), a recurring theme is the lackof clarity about where HUD is at any given timein its due diligence. In the aftermath of the Of-fice of Multifamily Housing’s transformation,regional and satellite offices have becomelarge processing centers, making it challeng-ing for program participants to know wheretheir deal is in the assembly line. The samecan be said of HUD’s Office of ResidentialCare Facilities (“ORCF”), whose decentralizedstructure can subject a single deal to touchpoints in Washington, D.C., Seattle, and vari-ous places in between.

Here are a few pointers on how to navigatethe bureaucracy and keep your loan sailing to-ward endorsement.

1. Get an Organizational Chart

As a starting point, ask the HUD closingcoordinator assigned to your deal for anorganizational chart covering whichever HUDoffice you are dealing with. If you are workingwith a satellite office, ask for an organizationalchart for the relevant regional office as well.The charts allow you to see who reports towhom and can be useful when you see unfa-miliar names copied on emails from the clos-ing coordinator. And when a deal stalls, thecharts may offer some clues as to which HUDemployee can assist (more on that in No. 6below).

2. Get to Know the HUD Staff BeforeThere’s an Emergency

Whenever a firm commitment hit my desk atHUD, I would appreciate it when someonerepresenting the lender called me and broughtme up to speed on the deal basics and theproposed timeline for closing. Starting the re-lationship on the right foot — in a spirit of

*Jim Provenzale is counsel at Faegre Drinker Biddle & Reath LLP specializing in commercial real estate financelaw and Federal Housing Administration-insured mortgage loans. Mr. Provenzale was a real estate attorney with theU.S. Department of Housing and Urban Development. He may be reached at [email protected].


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partnership and collaboration — went a longway in terms of building a reserve of goodwill.By contrast, on those transactions where Inever spoke with the parties until there was acrisis, I felt a lot less motivated to push for aquick resolution. I know that most of the clos-ing coordinators I worked with at HUD felt thesame way.

3. Respect the Closing Coordinator’sRole

The closing coordinator is supposed to bethe HUD program office’s single point ofcontact with the lender and borrower fromcommitment to closing. If you make a habit ofreaching out directly to the HUD staff workingbehind the scenes on your deal (e.g., theconstruction analysts, underwriters, etc.), yourisk alienating the closing coordinator, whoultimately has more control over the closingprocess than anyone else at HUD. Stay onthe closing coordinator’s good side by respect-ing his or her role as HUD’s primarygatekeeper. Just be patient — most of thecoordinators I have worked with are shoulder-ing massive workloads.

4. Use Other HUD Offices asReference Points

Embracing the HUD bureaucracy to speedup closing sometimes involves mentioningHUD offices other than the one you are cur-rently dealing with. If the HUD office in Minne-apolis is handling a given issue differently fromthe office in Fort Worth, Texas, you should letMinneapolis know about the discrepancy. Butproceed with caution: If the full extent of yourargument is “Fort Worth let us do it this way,”be prepared to get shot down. The HUD staffin Minneapolis needs to understand the under-

lying business or legal reasons for your pro-posed course of action. After all, Minneapolisis not bound by Fort Worth’s decisions.

5. Assert Your Right to Know Wherethe Bottleneck Is

Program participants who honor the closingcoordinator as the central figure on HUD’steam should expect to see that respect recip-rocated in the form of clear and frequent com-munication on the status of HUD’s review. Ifyou submit draft documents and get twoweeks of radio silence in response, you shouldnot hesitate to inquire as to where in HUD’ssystem the documents are stalled. The federalgovernment is legally required to be transpar-ent in its dealings with the public — theFreedom of Information Act (“FOIA”) is the rel-evant statute — so if you are not gettingstraight answers from the closing coordinatoron which HUD employees have not completedtheir reviews, insist on clarity.

6. Elevate the Matter (As a LastResort)

If, after repeated attempts, you still feel likeyou are in the dark as to what is happeningwith your transaction, make use of that organi-zational chart to contact the relevant HUD em-ployees (copying the closing coordinator) orthe branch chief directly. Yes, I know, this ap-pears to contradict my advice in No. 3 above,but sometimes patience and respecting therole of the coordinator will only get you so far.

The same advice applies to interactions withthe HUD closing attorney. If communicationsbreak down, you are within your rights toelevate the matter to the associate regionalcounsel, chief counsel, or regional counsel, asthe case may be. You can easily get contact



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information for managers in HUD’s Office ofGeneral Counsel (“OGC”) with a Googlesearch.

Do you risk burning bridges by following thisadvice? Perhaps. But bear in mind, you arepaying HUD considerable sums of money toprocess your deal, and responsive customerservice is a reasonable expectation, even ifHUD has lots of competing work. You can mit-

igate the risk of a burnt bridge by elevatingonly as a last resort and doing so with theutmost diplomacy.

Here’s the moral of the story: If you are look-ing to add velocity to your Federal HousingAdministration closings, embrace HUD’s bu-reaucracy as an essential (albeit clunky) toolfor removing transactional obstacles.

FHA Deal Accelerators: Embrace the Bureaucracy


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FHA Deal Accelerators: How to SecureBuy-In From Secondary Lenders and

Commercial TenantsJim Provenzale*

In the context of a typical Housing and Urban Development-insured closing, the authorof this article asks and answers the question: who is least motivated to get the noteendorsed? He then discusses how to keep the least motivated parties engaged in thetransaction.

“Motivation is the art of getting people to dowhat you want them to do because they wantto do it.” — Dwight D. Eisenhower

Having led the Allies to victory over Hitler inWorld War II, our 34th president knew what hewas talking about when it came to motivation.It is fun to imagine how Ike might have de-ployed his wisdom on motivation if he everhad to gear up for a Section 223(f) closing.Which parties might have needed an extranudge from the commander in chief to keepthe deal marching forward? In other words, inthe context of a typical U.S. Department ofHousing and Urban Development (“HUD”)-insured closing, who is least motivated to getthe note endorsed?

Surely not the lenders — their representa-tives are chomping at the bit to earn their feesand move on to the next deal.

Surely not the borrowers — their principalsare eager to avoid extension fees and startenjoying lower monthly payments.

Surely not the attorney, surveyor, or titlecompany — they generally do not get paiduntil the deal closes, and they won’t be re-tained in the future if they contribute to a clos-ing delay.

You might be tempted to say HUD is theleast motivated party. But I can assure you,having worked at the department for manyyears, that most of my former colleagues weredriven to get loans closed. Some staff wereinspired to help HUD fulfill its mission, whileothers pushed toward closing simply so theycould clear some space on their desks.

Reflecting on my chief counsel days, therewas one type of entity that consistentlydragged its feet en route to endorsement:those that were required to subordinate their

*Jim Provenzale is counsel at Faegre Drinker Biddle & Reath LLP specializing in commercial real estate financelaw and Federal Housing Administration-insured mortgage loans. Mr. Provenzale was a real estate attorney with theU.S. Department of Housing and Urban Development. He may be reached at [email protected].


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interests to the new mortgage. This categoryincludes tenants under commercial leases andsecondary lenders whose debt survives theHUD-insured closing. Let’s call them thesubordinates.

The subordinates are poorly motivatedbecause, unlike just about everyone elseinvolved in the deal, they do not stand to ben-efit financially once the loan proceeds start toflow. To make matters worse, the subordinatesare often the most neglected party to the HUDtransaction. After all, they only sign one or twodocuments, so it is common for them to getlost in the flurry of activity leading up toclosing. But make no mistake about it: Thesubordinates, neglected and unmotivated asthey may be, are essential in the sense thatclosing cannot happen without their sign-off.

How Do You Keep These PartiesEngaged?

In the absence of economic motivation,commercial tenants and secondary lendersneed to receive persistent requests for coop-eration (or, shall we say, polite nagging) fromborrowers and lenders. Here are some politenagging techniques to try on your next HUDdeal.

Start Early

Given the high likelihood of subordinatesbalking, it pays to get on their radar early. Infact, contact them as soon as the firm commit-ment is issued and introduce them to HUD’sSubordination Agreement. Waiting until a weekor two before closing to start the subordinationconversation is a recipe for a bumpy andstressful ride to endorsement.

Compliment and Commiserate

When introducing subordinates to HUD’sSubordination Agreement, set the stage by let-ting them know upfront that getting modifica-tions to the document will be an uphill battle. Ifyour subordinate is a governmental entity,HUD’s Closing Guide provides a path fornegotiating the Subordination Agreement,1 butgoing down that path is time-consuming. Bycontrast, the Subordination, Non-Disturbanceand Attornment Agreement2 (“SNDA”) for com-mercial tenants is not an official HUD form andtheoretically more open to negotiation. Never-theless, HUD offices are generally uncomfort-able straying from the sample SNDA.

Even after setting the stage, most subordi-nates, unwilling to go down without a fight, willpropose at least a handful of tweaks to theHUD language. At that point, I’d recommend aresponse like this:

Thank you for your comments on the Subordi-nation Agreement. I think many of your re-quested revisions are perfectly reasonable,and if we were in a conventional loan setting,I’d be inclined to accept most of them andmove on. But in my experience, HUD almostalways rejects requests for modifications.Would you be willing to reconsider and acceptthe language as-is?

By commiserating with subordinates overHUD’s lack of flexibility in this area — ratherthan arguing with them about whether theirrevisions are legally material — you boost theodds of getting them to accept the standardlanguage.

Show Them “Before-and-After”Pictures

In conversations with subordinates, I findthat many of them feel like they are beingrailroaded into giving up all their rights. But in



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almost all cases, the subordinates will not, asa result of the HUD closing, lose their relativepriority in the project’s overall financingstructure. More likely than not, they are al-ready subordinate to a mortgage. You aresimply asking them to re-subordinate to a dif-ferent mortgage. Their “before-and-after”pictures will look pretty much the same. Simplyreminding them of this fact may get them toreconsider their ini t ial opposit ion tosubordination.

With Commercial Tenants, Check forSubordination Requirements in TheirLeases

When responding to requests to subordi-nate, the most challenging commercial tenantswill refuse to cooperate unless their demandsare met. However, these tenants may overes-timate their bargaining power. It is not unusualfor commercial leases to contain a provisionsuch as: “Upon the request of Landlord, Ten-

ant agrees to subordinate its rights under thislease to the lien of one more mortgages nowor hereafter in effect . . .” It is worthwhile tocheck the underlying lease for similar languagewhen dealing with especially obstinate com-mercial tenants. With some luck, you’ll findsuch language, at which point you can remindthe tenants that subordination is not optional.

The Bottom Line

When your HUD deal involves subordina-tion, talking early, often and strategically withthe least motivated parties can make the dif-ference between a smooth closing and thedreaded last-minute scramble that leaveseveryone with a bad flavor in their mouths.

NOTES:1 https://www.hud.gov/sites/documents/92420M.

PDF.2 https://www.hud.gov/sites/documents/11-07HSGN.

PDF.

FHA Deal Accelerators: How to Secure Buy-In From Secondary Lenders and CommercialTenants


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California’s 2020 Housing Laws: WhatYou Need to Know

Chelsea Maclean, Daniel R. Golub, Kevin John Ashe, and

Paloma Perez-McEvoy*

A statewide rent control measure, new procedural protections, significant steps forwardfor accessory dwelling units, surplus land amendments, and regional funding authoritiesare among the highlights of California’s 2020 housing laws this article discusses.

Highlights

E The biggest news out of Sacramento inhousing law is a historic measure provid-ing statewide rent control and “just cause”eviction requirements for Californiarenters.

E For advocates of increased housing pro-duction, the most significant effort en-acted into law is the “Housing Crisis Act,”which creates important new vestingrights for housing developments andlimits on local review procedures.

E The California Legislature also againembraced Accessory Dwelling Units witha package of laws that some are calling“the end of single-family zoning,” allowingmost single-family homes to be convertedinto three separate housing units.

E In its first year, the Newsom Administra-tion is focusing on planning for housing

development on surplus state lands andfurther reforming the regional housingneeds allocation process. It remains tobe seen whether next year’s legislativesession will yield the major steps forwardon streamlining housing approvals thatwill be necessary for the administrationto come close to meeting its goal of build-ing 3.5 million homes by 2025.

As California’s housing supply and home-lessness crisis continues, the State Legislaturehas for the past several years passed numer-ous pieces of housing legislation in eachlegislative session. This year was no excep-tion, with more than 30 individual pieces ofhousing legislation enacted into law.

This article takes a closer look at these laws,grouped into following categories:

E Tenant Protections. A statewide rentcontrol measure that will take effect in

*Chelsea Maclean ([email protected]) is a partner at Holland & Knight LLP in the firm’s West CoastLand Use and Environment Practice Group counseling clients on all aspects of land use development. Daniel R. Golub([email protected]), Kevin John Ashe ([email protected]), and Paloma Perez-McEvoy ([email protected]) are associates in the firm’s West Coast Land Use and Environment Group.


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2020, among other tenant protectionmeasures.

E Streamlining, Increasing Density andReducing Barriers to Production. SenatorNancy Skinner’s “Housing Crisis Act” cre-ates important new vesting rights forhousing developments, and the Legisla-ture has also enacted important newreforms to the Density Bonus Law andclarifications to SB 35’s Streamlined Min-isterial Approval Process.

E Accessory Dwelling Units (“ADUs”) and“Triplexes.” A groundbreaking package ofnew laws that some are calling “the endof single-family zoning” will create newincentives and streamlined processes tobuild ADUs and triplexes.

E Surplus Land Availability / Planning andImpact Fee Data. New laws significantlyexpand Surplus Lands Act requirementsfor local agencies in an effort to achievemore affordable housing on surplus pub-licly owned properties.

E CEQA and Housing. The major transitstop definition was broadened to makemore projects eligible for streamlining anda handful of limited California Environ-mental Quality Act (“CEQA”) exemptionswere created for specific homelessnessprojects.

E Funding. Governor Gavin Newsom ve-toed a bill that would have created an “Af-fordable Housing and Community Devel-opment Investment Program” that wouldhave revived redevelopment, but hesigned a number of smaller funding bills,including laws that will create new re-

gional finance agencies in the Bay Areaand the San Gabriel Valley.

This article also includes some observationsabout the important work California still needsto do to stem the housing crisis, and considerwhat may be around the corner in the 2020legislative session. Except where noted, thesenew laws took effect January 1, 2020.

Tenant Protections

The most significant housing law of the 2019legislative session was the enactment of astatewide rent control law.

AB 1482 (Assembly Member DavidChiu) — The Tenant Protection Act of2019

The Tenant Protection Act of 2019 enacts acap of five percent plus inflation per year onrent increases statewide for the next 10 years.The new law does not apply a cap to vacantunits, and owners can continue to reset rentsto market rate at vacancy. It also preventslandlords from evicting certain tenants withoutlandlords first providing a reason for the evic-tion and requires relocation assistance. Thelaw does not apply to properties built in thelast 15 years, nor does it apply to single-familyhome rentals (unless owned by large corpora-tions) or to projects already under constructionor under current rent control schemes. Thenew law defers to more stringent local mea-sures, including existing local rent control withlower limits and local just cause eviction laws.The law’s anti-eviction protections, whichwould limit evictions to lease violations orrequire relocation assistance, will kick in aftera tenant has lived in an apartment for a year.Governor Newsom’s enactment of a rent capcomes less than a year after California voters



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rejected a ballot measure1 that would haveexpanded local rent control policies statewide,which would have likely resulted in tighterrestrictions in some cities than those now of-fered by AB 1482.

AB 1110 (Assembly Member LauraFriedman) — Noticing Rent Increases

Noticing Rent Increases requires 90-day no-tice, rather than 60-day notice, before alandlord may increase the rent of a month-to-month tenant by more than 10 percent.

SB 329 (Assembly Member HollyMitchell) — Housing Discrimination

SB 329 prohibits landlords from discriminat-ing against tenants who rely on housing assis-tance paid directly to landlords, such as a Sec-tion 8 voucher, to help them pay the rent.

SB 18 (Senator Nancy Skinner) — TheKeep Californians Housed Act

This Act removes the December 31, 2019,sunset date on a state law which gives ten-ants at least 90 days’ notice before theirtenancy can be terminated if a landlord losesownership of their rental property as a resultof a foreclosure sale.

Streamlining, Increasing Density, andReducing Barriers to Production

Senator Skinner’s SB 330, the “HousingCrisis Act of 2019,” stands out as the mostimportant new law affecting large-scale hous-ing developments.

SB 330 (Skinner) — Housing Crisis Actof 2019

This Act includes a number of new proce-dural protections, including the following:

E Preliminary Application Protections —limitations on a jurisdiction’s ability tochange development standards and zon-ing applicable to the project once a “pre-liminary application” is submitted.

E Application Completeness Streamlining— amends the Permit Streamlining Actto specify what constitutes a “preliminaryapplication” and states that a jurisdictionhas one chance to identify incompleteitems in an initial application and afterthat may not request the submission ofany new information that was not in theinitial list of missing items.

E Fees/Exactions Limitations — preventsjurisdictions from increasing exactions orfees during a project’s application period,but allows such increases if the resolu-tion or ordinance establishing the feecalls for automatic increases in the feeover time.

E Hearing Limitations — prohibits cities orcounties from conducting more than fivehearings if a proposed housing develop-ment complies with the applicable, objec-tive general plan and zoning standards ineffect at the time an application isdeemed complete.

E Downzoning Prohibitions — prohibits ajurisdiction (with some exceptions) fromenacting development policies, standardsor conditions that would change currentzoning and general plan designations ofland where housing is an allowable useto “lessen the intensity of housing”; fromplacing a moratorium or similar restric-tions on housing development; from

California’s 2020 Housing Laws: What You Need to Know


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imposing subjective design standardsestablished after January 1, 2020; andlimiting or capping the number of landuse approvals or permits that will be is-sued in the jurisdiction, unless the juris-diction is predominantly agricultural.

Some of the most important provisions inSB 330 sunset on January 1, 2025, if notextended.

AB 1763 (Chiu) — Density Bonuses for100 Percent Affordable Projects

AB 1763 creates enhanced density bonusoptions, including a potential 80 percentincrease in base density and unlimited densitybonuses for qualifying projects within a half-mile of a major transit stop, under the StateDensity Bonus Law. However, this only ap-plies to projects that consist of 100 percent af-fordable housing (no more than 20 percentmoderate-income, and the remainder forlower-income).

AB 1485 (Assembly Member BuffyWicks) — Amendments to SB 35’sStreamlined Ministerial ApprovalProcess

AB 1485 makes a number of importantclarifications to SB 35 of 2017, a law that al-lows qualifying housing and housing-richmixed-use projects to qualify for a streamlined,ministerial CEQA-exempt approval process ifthe project meets the local government’sobjective zoning, subdivision and designreview standards, provides a specific minimumnumber of affordable housing units, agrees topay prevailing wages to construction workers,and meets other qualifying criteria. AB 1485amends SB 35 in several ways:

E Moderate-Income Options — broadenseligibility for SB 35 to Bay Area projectsthat provide 20 percent of their units formoderate-income households (less than120 percent of area median income),under certain conditions.

E Calculating “Two-Thirds” Mixed-Use Proj-ects — clarifies that the calculation todetermine if a project qualifies for SB 35where it consists of two-thirds residentialexcludes underground space such asparking garages and basements.

E Approval Expiration Dates — clarifies thatthe three-year expiration for SB 35 ap-provals in case of litigation expires threeyears after a final judgment upholding theapproval, and clarifies that the approvalalso remains valid as long as verticalconstruction of the development hasbegun and is in progress.

E Subsequent Permits — clarifies that localgovernments must issue subsequentpermits — such as demolition, grading,building permits and final maps — withoutunreasonable delay, as long as thosesubsequent permit applications substan-tially comply with the approved SB 35permit.

E Standards of Review and Consistencywith Other Laws — clarifies that the stan-dard for determining whether a projectqualifies for SB 35 is highly deferential tothe project applicant: a project complieswith SB 35’s criteria as long as “there issubstantial evidence that would allow areasonable person to conclude” that thedevelopment complies.

E Housing Accountability Act- clarifies that



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under existing law, SB 35 projects areentitled to protection under the HousingAccountability Act.

AB 101 — Housing Development andHousing 2019–20 Budget Act

AB 101 requires local governments to pro-vide “by right,” CEQA-exempt approvals tocertain qualifying navigation centers that movehomeless Californians into permanent housing.The law, which took effect on July 31, 2019,also creates additional incentives for cities tocomply with their mandates to plan for suf-ficient housing in their Housing Elements, andprovides some modest additional remediesthat the state can use in court when cities failto comply with housing element law. Thesereforms fall well short of Governor Newsom’sproposal at the beginning of 2019 to withholdstate money from cities that fail to plan for andapprove sufficient housing.

AB 430 (Assembly Member JamesGallagher) — The Camp Fire HousingAssistance Act of 2019

AB 430 is intended to create housing reliefin areas of Butte County, where the housingstock was devastated by the 2018 Camp Fire.The new law creates a streamlined, ministerialCEQA-exempt approval process in and adja-cent to the cities of Biggs, Corning, Gridley,Live Oak, Orland, Oroville, Willows and YubaCity for qualifying housing developments thatcomply with those localities’ objective zoning,subdivision, and design review standards.

AB 1783 (Robert Rivas) — FarmworkerHousing

AB 1783 creates a streamlined, ministerialCEQA-exempt approval process for qualifying

agricultural employee housing developmentson land zoned primarily for agricultural uses.

Accessory Dwelling Units and“Triplexes”

Accessory Dwelling Units (“ADUs”) are ad-ditional living quarters on the same lot as aprimary dwelling unit. While California lawshave paved the way for increased ADU devel-opment, some cities have enacted ordinancesthat render ADU development infeasible orcost prohibitive. By further reducing barriers toADU development, the new bills discussedbelow could bring tens of thousands of newADUs online over the next few years.

AB 68 (Assembly Member Phil Ting) /AB 881 (Assembly Member RichardBloom) / SB 13 (Senator BobWieckowski) — Processing Timelines,Ordinance Prohibitions and Triplexes

AB 68 requires local agencies to either ap-prove or deny an ADU project within 60 daysof receiving a complete building permit ap-plication on a ministerial (CEQA-exempt)basis. The new law further prohibits localagencies from adopting ADU ordinances that:impose minimum lot size requirements forADUs; set certain maximum ADU dimensions;require replacement off-street parking when a“garage, carport or covered parking structure”is demolished or converted to construct theADU. Notably, the new law allows for an ADUas well as a “junior” ADUs where certain ac-cess, setback, and other criteria are met —this has been referred to the “tripelex-ation” ofsingle-family zoning. The new law has alsoexplicitly identified opportunities for ADUs inmultifamily buildings, including storage rooms,boiler rooms, etc., where building standardsare met. New enforcement mechanisms have



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also been added. The Department of Housingand Community Development (“HCD”) maynow notify the Attorney General’s Office of anyviolations of these new provisions.

SB 13 (Senator Bob Wieckowski) —Owner-Occupancy Prohibitions andFee Limitations

SB 13 provides, until January 1, 2025, thatcities may not condition approval of ADU build-ing permit applications on the applicant beingthe “owner-applicant” of either the primarydwelling or the ADU. Additionally, agenciescannot impose impact fees on ADUs under750 square feet.

AB 587 (Friedman) — SeparateConveyances

AB 587 provides that local agencies maynow allow ADUs to be sold or conveyedseparately from a primary residence if certainconditions are met. Prior law that prohibitedADUs from being sold or conveyed separatelyfrom the primary residence in which they areco-located hindered shared ownership models,such as tenancies in common. This law,therefore, is expected to increase the ability ofaffordable housing organizations to sell deed-restricted ADUs to eligible low-incomehomeowners.

AB 670 (Friedman) — HOA Limitations

AB 670 prevents homeowners’ associationsfrom barring ADUs. Many single-family neigh-borhoods in California were established ascommon-interest developments under theDavis-Stirling Common Interest DevelopmentAct. These properties are typically governedby a set of Covenant, Conditions and Restric-tions (“CC&Rs”), which often restrict the types

of construction that can occur within andadjacent to a member’s home. AB 670 makesunlawful any HOA condition that “prohibits orunreasonably restricts” the construction ofADUs on single-family residential lots.

AB 671 (Friedman) — LocalGovernment Assistance

AB 671 requires local governments to in-clude in their General Plan housing elementsplans to incentivize and promote the creationof affordable ADUs. The law also requiresHCD to develop, by December 31, 2020, a listof state grants and financial invectives for ADUdevelopment.

Surplus Land Availability, Planning andImpact Fee Data

Several new laws intend to collect and makeinformation available regarding surplus stateand local land suitable for affordable residen-tial development and to revamp the SurplusLands Act procedures to ensure that afford-able housing entities have early opportunitiesto purchase available land. Other notable lawsrequire reporting on impact fees and HCD toprepare a 10-year housing data strategy.

AB 1486 (Ting) — Surplus Lands ActProcess Amendments

These Amendments expand the SurplusLands Act’s (“Act”) requirements for localagencies in an effort to achieve more afford-able housing on surplus properties. Existinglaw requires agencies, when disposing ofsurplus land, to first offer it for sale or leasefor the purpose of developing affordablehousing. The bill analysis states that localagencies have attempted to circumvent theAct process in the past. Notable amendments



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include a new requirement for a local agencyto provide information about its disposition pro-cess to HCD and for HCD to submit, within 30days, written findings of any process violationsthat have occurred. Amendments also providethat a local agency that violates the Act is li-able for 30 percent to 50 percent of the finalsale price.

SB 6 (Senator James Beall) —Available Residential Land

SB 6 requires local agencies preparing ahousing element or amendment on or afterJanuary 1, 2021, to submit an inventory of landsuitable residential development. Additionally,new law requires HCD to provide to theDepartment of General Services a list of landssuitable and available for residential develop-ment that were identified by a local govern-ment as part of the housing element. TheDepartment of General Services must createa database of information regarding availablelocal and state lands available and searchableby the public online.

AB 1255 (Rivas) — Surplus PublicLand Inventory

AB 1255 further requires agencies to makea central inventory of all surplus land and toreport such information to HCD by April 1 ofeach year, beginning April 1, 2021. Agenciesare further required to provide a list of itssurplus land to requesting parties withoutcharge. HCD must then report the informationto the Department of General Services forinclusion in a digitized inventory or surplusproperties.

AB 1483 (Assembly Member TimGrayson) — Housing Impact Fee DataCollection and Reporting

AB 1483 requires local agencies to make in-formation available on housing developmentfees, applicable zoning ordinances and stan-dards, annual fee reports and archived nexusfee studies. Such agencies are then requiredto update the information within 30 days ofany changes. Additionally, HCD will be re-quired, on or after January 1, 2020, to preparea 10-year housing data strategy that identifiesthe data useful to enforce existing housinglaws and inform state housing policymaking.Among other information requirements, thestrategy must include information that providesa better understanding of project appeals, ap-provals, delays and denials and provides anunderstanding of the process, certainty, costsand time to approve housing.

SB 235 (Senator Bill Dodd) — NapaRegional Housing Need AllocationReporting

SB 235 allows the City of Napa (“city”) andCounty of Napa (“county”) to reach an agree-ment under which the county would be allowedto count housing units built within the city inconnection with the approximately 700 unitNapa Pipe project toward the county’s regionalhousing needs assessment requirement. Thegovernor’s signing statement included anunusually direct message that the governor“expects permits will be issued expeditiouslyby the local jurisdictions, allowing [the] projectto proceed immediately.”

CEQA and Housing

Legislative efforts regarding CEQA includean important revision broadened the definition



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of a major transit stop as well as streamliningthe process for supportive housing and home-less shelter projects.

AB 1560 (Friedman) — Defining “majortransit stop”

AB 1560 broadens the definition of a “majortransit stop” under Public Resources CodeSection 21064.3 to include bus rapid transit.Projects located within a half-mile of a qualify-ing bus rapid transit stop that meet otherqualifying conditions may qualify for multiplebenefits: parking reductions pursuant to theState Density Bonus Law; CEQA infill housing,aesthetic and parking exemptions; SB 375streamlining for qualifying transit priority proj-ects; a less than significant Vehicle Miles Trav-eled (“VMT”) impact presumption. The newdefinition also applies to local incentives, suchas those adopted per Measure JJJ and imple-mented in the City of Los Angeles’ TransitOriented Guidelines, for residential projects lo-cated within 1,500 feet of a major transit stop.

SB 744 (Senator Anna Caballero) — NoPlace Like Home Projects

SB 744 streamlines the approval processfor supportive housing projects by clarifyingthat a decision to seek funding through the NoPlace Like Home program is not a project forthe purpose of CEQA. No Place Like Home isa voter-approved bond measure that will al-locate up to $2 billion for the development ofpermanent supportive housing and wraparound mental health services. The new lawalso provides a number of clarifying amend-ments that ensures a local government’sdesign standards, impact fees and exactionsare applied similarly to supportive housingprojects as other residential projects in thesame zone.

AB 1197 (Assembly Member MiguelSantiago) — CEQA Exemption forSupportive Housing and EmergencyShelters

AB 1197 exempts from CEQA, until January1, 2025, any action taken by certain local pub-lic agencies to convey, lease, encumber land,or provide financial assistance in furtheranceof providing emergency shelters or supportivehousing in the City of Los Angeles. The legisla-tion carried an urgency clause, making thenew law effective on September 26, 2019.

Funding

Hopes of a return to Redevelopment Author-ity days were dashed when Governor Newsomvetoed SB 5 (Beall), which would have cre-ated the “Affordable Housing and CommunityDevelopment Investment Program,” a programsimilar to redevelopment in which cities andcounties could redirect local property taxrevenues toward projects such as affordablehousing. In his veto message,2 GovernorNewsom cited the potential for the program tocost $2 billion annually. The governor andLegislature did, however, successfully enactinto law a number of bills aimed at increasingoverall funding for housing development,including laws that will create new regionalfinance agencies in the Bay Area and the SanGabriel Valley. Such housing bills include:

AB 1487 (Chiu) — Bay Area HousingFinance Authority (“BAHFA”)

BAHFA establishes a new regional authorityto raise, administer and allocate funding for af-fordable housing in the San Francisco Bayarea, and provide technical assistance at aregional level for tenant protection, affordablehousing preservation, and new affordable



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housing production. BAHFA will be governedby the Metropolitan Transportation Commis-sion (“MTC”) Board and staffed with MTCpersonnel, but will operate as a separate legalentity than MTC. The law permits BAHFA, withapproval from the Association of Bay AreaGovernments, to place measures on theregional ballot measure to raise funding for af-fordable housing, including parcel taxes (onper parcel basis) or special taxes on busi-nesses (measured by gross receipts).

SB 751 (Senator Susan Rubio) — SanGabriel Valley Regional Housing Trust(“Trust”)

SB 751 authorizes the creation of the Trust,a joint powers authority, by the County of LosAngeles and any or all of the cities within thejurisdiction of the San Gabriel Valley Councilof Governments, with the stated purpose offunding housing to assist the homeless popu-lation and persons and families of extremelylow, very low and low income within the SanGabriel Valley. SB 751 authorizes the Trust tofund the planning and construction of housing,receive public and private financing and funds,and issue bonds.

AB 116 (Ting) — EnhancedInfrastructure Financing DistrictCreation

AB 116 removes the requirement that En-hanced Infrastructure Financing Districts(“EIFDs”) must receive voter approval prior toissuing bonds. EIFDs were created by theLegislature in 2014 after the demise of redevel-opment in order to allow local governments todevote tax-increment financing for public andprivate projects such as transportation facili-ties, environmental remediation, and afford-able housing. Instead of requiring voter ap-

proval, the law will now permit the EIFD’sgoverning body to issue bonds as long as itsresolution to do so contains specified informa-tion related to the issuance of the bonds, andthe board holds at least three public hearingson an enhanced infrastructure financing plan.

SB 196 (Beall) — Community LandTrust Tax Exemption

SB 196 enacts a new welfare exemption forproperty owned by a Community Land Trust(“CLT”) that is being or will be developed orrehabilitated as housing. Traditionally, underCalifornia law property used for religious,hospital, scientific or charitable purposes isexempt from property taxes under the “welfareexemption.” The new legislation extends theexemption during the construction phase untilthe homes are sold, but provides that a CLTwill be liable for property taxes if the propertywas not developed, rehabilitated, or in thecourse of construction within five years of thelien date following its acquisition.

AB 1743 (Bloom) — Welfare Exemption

AB 1743 expands the properties that areexempt from Community Facilities District(“CFD”) taxes to include properties that qualifyfor the property tax welfare exemption, andlimits the ability of local agencies to rejecthousing projects because they qualify for theexemption.

SB 113 (Committee on Budget andFiscal Review) — National MortgageSpecial Deposit Fund (“Fund”)

SB 113 enables $331 million in state fundsto be transferred to the Fund to provide fund-ing for borrower relief and legal aid to vulner-able homeowners and renters.



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AB 1010 (Assembly Member EduardoGarcia) — Housing Program EligibleEntities

AB 1010 allows duly constituted governingbodies of Native American reservations andRancherias eligible applicants to participate invarious state affordable housing programs.

Conclusion

The Legislature’s housing output is certainlyimpressive in terms of total volume — and thenew ADU package and SB 330 are importantsteps forward for homebuilders and housingadvocates alike. But it is important to put theseefforts within the context of the immense scaleof California’s housing supply crisis.

California home values remain the highestin the nation,3 and California renters pay 43percent above the nationwide median, leadingto immense strain on low- to moderate-incomehouseholds. The homelessness crisis is evi-dent on the streets of every city, and thestate’s homeless residents represent a quarterof the national total.4 Yet homebuilding in Cali-fornia has averaged less than 100,000 newunits per year,5 much slower than in otherstates.

Prompted by the important work of the“Three P’s” Coalition for Housing Production,Protection and Preservation,6 the governorpushed for a major effort that would takedramatic steps forward on all three of theseareas, by limiting the ability of local govern-ments to obstruct housing development, andeven promising to withhold state transporta-tion funding7 from local governments that failto approve their fair share of affordablehousing.

In the end, the Legislature’s statewide rent

control bill represented an historic step forwardfor “Protection” and “Preservation.” But lawsthat would have represented a comparablydramatic step forward for housing production,such as Senator Scott Wiener’s SB 50,8 werenot enacted. (SB 50, which will return nextsession, would eliminate highly restrictive zon-ing rules near existing job centers and publictransportation.) The governor abandoned hisproposal to withhold transportation funds fromlocal governments that fail to meet their fairshare of housing goals. Meanwhile, midyearstatistics show that 2019 new housing startsmay even decline in production from prioryears9 — and certainly will come nowhere nearthe 500,000 units annually that would be nec-essary to stay on pace to meet the administra-tion’s goals.

In this year’s package of housing laws, theLegislature has continued emphasizing (asseen in AB 68, AB 881, AB 101, AB 1485, SB744, AB 1197, AB 1763 and AB 430) that itbelieves that the best way to build housing isto reform and streamline the local review pro-cess and move toward a “by right” model forhousing that complies with local zoning andplanning rules. However, the Legislaturecontinues to apply this principle on a verylimited scale rather than to advance theconstruction of the 3.5 million homes thatGovernor Newsom has said must be built by2025. In next year’s session, builders andhousing advocates must be active and vocalto ensure that California rises to the challengeof the housing crisis.

NOTES:1 https://www.latimes.com/politics/la-pol-ca-propositi

on-10-rent-control-next-20181108-story.html.2 https://www.gov.ca.gov/wp-content/uploads/2019/



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10/SB-5-Veto-Message.pdf.3 https://www.ppic.org/wp-content/uploads/california

s-future-housing-january-2019.pdf.4 https://www.ppic.org/blog/a-snapshot-of-homeless

ness-in-california/.5 https://calmatters.org/housing/2019/09/newsom-cal

ifornia-housing-done-not-done/.

6 https://www.3pshousingplan.org/.7 https://calmatters.org/housing/2019/01/newsom-ho

using-budget-big-deal-california/.8 https://leginfo.legislature.ca.gov/faces/billNavClien

t.xhtml?bill_id=201920200SB50.9 https://www.ppic.org/blog/new-housing-permits-dec

line-statewide/.



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SB 330 Provides Relief to CaliforniaHomebuilders

David H. Blackwell and Angus C. Beverly*

California’s governor recently signed Senate Bill 330, also known as the “Housing CrisisAct of 2019.” Of particular interest to developers, the legislation creates a new form ofstatutory vested rights, tightens local approval procedures, restricts the adoption of newregulations that impede new housing, and provides new judicial relief options forresidential development projects. The authors of this article explain the new legislation.

As part of an 18-bill housing package,Governor Newsom signed Senate Bill 330,1

also known as the “Housing Crisis Act of2019.” SB 330 addresses the statewide hous-ing crisis by restricting local rules that limithousing production and further strengthensthe Permit Streamlining Act2 and the HousingAccountability Act.3 SB 330 declares a state-wide housing emergency in effect until Janu-ary 1, 2025, when several components of thelaw will expire.

Of particular interest to developers, thelegislation creates a new form of statutoryvested rights, tightens local approval proce-dures, restricts the adoption of new regula-tions that impede new housing, and providesnew judicial relief options for residentialdevelopment projects.

Very Early Vested Rights

For housing developments, SB 330 creates

a two-step application process through modifi-cations to the Housing Accountability Act(“HAA”) and Permit Streamlining Act (“PSA”).An application is “deemed complete” when theapplicant submits a “preliminary application”that complies with new Section 65941.1. Un-like the PSA’s traditional back and forthregarding an application’s completeness, apreliminary application is deemed complete solong as the items in Section 65941.1 areprovided, and there is no requirement that thelocal agency makes an affirmative determina-tion of completeness.

With regard to vesting, a housing develop-ment project shall be subject only to the ordi-nances, policies, and standards adopted andin effect when a preliminary application issubmitted, which is very early in the processand predates the vesting afforded by a vestingtentative map.

*David H. Blackwell is a partner at Allen Matkins Leck Gamble Mallory & Natsis LLP managing the full range ofreal estate and land use matters, from initial due diligence, acquisitions, and land use entitlements, to lawsuits and ap-peals that arise. Angus C. Beverly is an associate at the firm and a member of the firm’s Real Estate and Land Usegroups. The authors may be reached at [email protected] and [email protected], respectively.


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Exceptions to SB 330’s early vesting include:

E Increases to fees, changes, or monetaryexactions that based on an independentlypublished cost index;

E Upon a showing under a preponderanceof the evidence that the new regulation isnecessary to avoid specific impacts onthe public health or safety;

E If necessary to avoid or substantiallylessen a project’s impact under the Cali-fornia Environmental Quality Act;

E If a project has not initiated constructionwithin 2.5 years after the project received“final approval,” which includes all ap-plicable administrative appeal periodsand statutes of limitations; and

E If the housing development is revised fol-lowing the submittal of a preliminary ap-plication by 20 percent or more in eithersquare footage or number of residentialunits.

Similar to the last bullet, if the applicant altersthe project after submittal of the preliminaryapplication in a way that changes the residen-tial unit number or square footage by 20percent or more, the project shall not bedeemed to have submitted a preliminaryapplication.

Streamlining the Permit StreamliningAct

Within 180 days after submittal of a com-plete preliminary application, the applicantmust submit a development application, asdefined by the PSA, which is reviewed by thelocal agency under stricter PSA requirements.If the local agency determines that the devel-

opment application is incomplete, the agencyshall provide the project applicant a writtendetermination which includes an “exhaustivelist” of items that need to be in the application.Local agencies shall not request the applicantto provide any new information that was notenumerated in the initial list of items that weredeemed incomplete. The local agency has 30days from when it has received the applicationfor a development project to send this exhaus-tive list. This new “exhaustive list” requirementis not limited to housing projects but to all“development projects.”

Until January 1, 2025, SB 330 would reducethe time period in which a lead agency isrequired to approve or disapprove a housingproject under the Permit Streamlining Act from120 days from the certification of an environ-mental impact report to 90 days, and from 90days to 60 days for a development project thatcomplies with affordable housing requirementspursuant to Section 65950(a)(3)(A) of theGovernment Code. Commencing January 1,2025, both timeline requirements will revertback to their original lengths, respectively.

In addition to the new timing requirementsoutlined above, SB 330 requires cities andcounties to consider and either approve ordisapprove an application in no more than fivehearings (which includes continued hearings),consistent with the timelines under the PSA.

SB 330 Judicial Relief Changes

SB 330 reorganized sections of the HAAregarding judicial enforcement to distinguishbetween affordable housing projects and otherhousing projects (these provisions do notsunset), and attempts by local agencies tosubject a housing project to new local regula-



64

tions in violation of SB 330’s restrictionsdiscussed below.

Restrictions on New Local Regulations

Until January 1, 2025, SB 330 prohibits cit-ies and counties, including the electorate byusing its local initiative or referendum power,from establishing rules that would effectively:

E Change the land use designation or zon-ing of parcels to a less intensive use orreducing the intensity of the land that wasallowed under the specific or general planas in effect on January 1, 2018;

E Impose or enforce a moratorium on hous-ing development within all or a selectionof the local agency’s jurisdictions;

E Impose or enforce new design standardsestablished on or after January 1, 2020,that are not objective design standards;and

E Establish or implement limits on permitnumbers issue by the city or county un-less the limit was approved before Janu-

ary 1, 2005, in a “predominantly agricul-tural county.”

Housing Replacement Requirements

In an effort to protect existing housing stock,SB 330 prohibits cities and counties from ap-proving housing development projects thatrequire the demolition of residential dwellingsunless the project would at least replace everydemolished dwelling unit at a one to one ratio.Furthermore, housing developments mustreplace all “protected units” subject to a rentor price control.

Takeaways

Although the bulk of this legislation sunsetson January 1, 2025, it provides housing proj-ect applicants with new procedural and sub-stantive protections that should be carefullyconsidered.

NOTES:1 https://leginfo.legislature.ca.gov/faces/billTextClien

t.xhtml?bill_id=201920200SB330.2Gov. Code § 65920 et. seq.3Gov. Code § 65589.5 et. seq.

SB 330 Provides Relief to California Homebuilders


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New Jersey District Court LeavesPlaintiff Without Course of Relief Under

CERCLAJordan M. Asch*

The U.S. District Court for the District of New Jersey recently handed down a decisionthat may be troubling for parties seeking to recover environmental cleanup costs under theComprehensive Environmental Responsive Compensation and Liability Act. The author ofthis article discusses the decision.

In Stahl v. Bauer Auto, Inc.,1 the U.S. DistrictCourt for the District of New Jersey handeddown a decision that may be troubling for par-ties seeking to recover environmental cleanupcosts under the Comprehensive EnvironmentalResponsive Compensation and Liability Act(“CERCLA”).

Background

By way of background, CERCLA generallyprovides a private cause of action to plaintiffsin two circumstances.

The first falls under Section 107(a),2 whichallows a plaintiff to seek recovery of responsecosts that it has incurred from other potentiallyresponsible parties.

The second falls under Section 113(f),3

which allows a plaintiff that is or was thedefendant of a cost recovery claim, or that hasresolved its liability with the EnvironmentalProtection Agency (“EPA”) under a judicially

approved settlement, to seek contribution fromother potentially responsible parties.

Generally, a party that has incurred or willincur costs under CERCLA falls under one orboth of these two categories. However, thedistrict court in Stahl held that there is at leastone scenario where a plaintiff does not fall intoeither of these two categories and thereforehas no claim under CERCLA.

The Factual History

The factual history in the Stahl matter is longand complex. In short, the underlying environ-mental cleanup was at a property in Chatham,New Jersey. The plaintiffs owned a companycalled National Manufacturing Company(“NMC”), which owned the property (the “NMCProperty”). The plaintiffs entered into a StockPurchase Agreement (“SPA”) with a third party,Waverly Partners, for the sale of all outstand-ing shares of NMC. The SPA included an

*Jordan M. Asch is an associate at Gibbons P.C., representing clients in environmental litigation in both state andfederal matters. He may be reached at [email protected].


67

indemnification whereby the plaintiffs agreedto indemnify NMC for all costs NMC incurredto remediate the site for contamination exist-ing at the site as of the closing. A supplementalagreement to the SPA placed the legal obliga-tion for the cleanup of the site on NMC, whichwould be the surviving entity after closing.

After the closing, various disputes arose be-tween the plaintiffs and NMC regarding theenvironmental contamination and remediationof the NMC Property. The plaintiffs eventuallyfiled a lawsuit against NMC and NMC re-sponded with a counterclaim under the SPA.NMC did not assert any claims against theStahls under CERCLA. The parties settled thelawsuit by submitting their claims to bindingarbitration and an arbitration panel issued afinal arbitration award in May 2005. In accor-dance with the arbitration award, the plaintiffsreimbursed NMC for the costs of the investiga-tion and remediation.

The Present Case

In the present case, the defendants own andoperate the adjacent property (the “BauerProperty”). The plaintiffs alleged that the BauerProperty was the source of certain contamina-tion detected on the NMC Property and soughtdamages for the monies reimbursed to NMCin the district court under CERCLA Section107 and 113, the New Jersey Spill Compensa-tion and Control Act (“Spill Act”),4 and undervarious common law claims.

On summary judgment, the district courtdismissed the CERCLA claims, and dismissedwithout prejudice the state law claims, whichwould still allow plaintiffs to pursue damagesunder those claims in state court. The courteasily disposed of the Section 113 claims

because the plaintiffs had never been suedunder CERCLA and had not resolved itsCERCLA liability with EPA under a judiciallyapproved settlement. The court also noted thatthe plaintiffs failed to oppose the defendants’summary judgment motion as to the Section113 claim and therefore the court deemed thatthe plaintiffs had abandoned the claim.

As to the Section 107 claim, relying on theU.S. Supreme Court’s decision in U.S. v.Atlantic Research Corporation,5 the districtcourt emphasizes that relief under Section 107is only available to a plaintiff that has “incurred”its own response costs in cleaning up a site.Thus, a party that pays to satisfy a settlementagreement or judgment against it does notincur its own response costs and is not entitledto relief under Section 107.

The plaintiffs admitted that they did notconduct the environmental investigation andremediation at the NMC Property. Instead,NMC conducted this work and incurred the re-sponse costs. The plaintiffs reimbursed NMCfor those response costs in accordance withthe arbitration award. Therefore, the plaintiffsdid not incur response costs and were notentitled to relief under Section 107.

In coming to this conclusion, the districtcourt distinguishes the U.S. Court of Appealsfor the Third Circuit opinion in Agere SystemsInc. v. Advanced Environmental Corporation.6

In that case, two plaintiffs brought Section 107cost recovery claims and the defendant arguedon appeal that those plaintiffs had paid moneyonly to satisfy a settlement agreement withother plaintiffs that had entered into consentdecrees with the U.S. Environmental Protec-tion Agency (“USEPA”) fund and perform re-medial work at the subject site.



68

The Third Circuit disagreed with that argu-ment because it did not view the SupremeCourt in Atlantic Research as having intendedto “deprive the word ‘incurred’ of its ordinarymeaning.” The court further reasoned that theplaintiffs had “put their money in the pot rightalong with the money from the signers of theconsent decrees.” However, the district courtin Stahl focused on the fact that the ThirdCircuit in Agere distinguished that case fromAtlantic Research because the SupremeCourt’s “statements [in Atlantic Research]were not made in the context of paymentsmade for on-going work.” This was dissimilarto the facts presented in Stahl, where the pay-ments were reimbursements to the partyconducting the on-going work.

The Supreme Court in Atlantic Research didnot address a situation like Stahl, where theparty fits neither under Section 107 nor Sec-tion 113. However, the underlying decision7 ofthe U.S. Court of Appeals for the Eighth Circuitanticipated such a situation and concluded thatthe broad language of Section 107 supportedan implied right of contribution.

In Atlantic Research, the Supreme Courtnoted the Eighth’s Circuit’s alternative holdingin a footnote, but did not reach the issue. TheStahl court did not address the issue. As aresult, the Stahls were unable to maintain a

CERCLA claim and could only pursue avail-able state court claims.

Conclusion

Although the Stahl case is an unpublisheddistrict court decision, it demonstrates that anyparty subject to potential environmental liabilityunder CERCLA must be mindful of how andwhen it pays any costs to resolve that liability.

A potentially responsible party cannot as-sume that the oft described “overlapping”recovery provisions of Section 107 and 113will provide an equitable resolution of a recov-ery or contribution claim against a third party.

Instead, the courts may impose a strict in-terpretation of the relief that is available underthe statute and this can leave a plaintiff withno course of relief under CERCLA.

NOTES:1 https://casetext.com/case/stahl-v-bauer-auto-inc.2 https://www.law.cornell.edu/uscode/text/42/9607.3 https://www.law.cornell.edu/uscode/text/42/9613.4 https://www.nj.gov/dep/srp/regs/statutes/spill_act.

pdf.5 https://casetext.com/case/us-v-atlantic-research-co

rporation.6 https://casetext.com/case/agere-systems-v-advanc

ed-environmental-tech.7 https://caselaw.findlaw.com/us-8th-circuit/1252611.

html.

New Jersey District Court Leaves Plaintiff Without Course of Relief Under CERCLA


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New Jersey Governor Murphy SignsExecutive Order Addressing ClimateChange Resiliency for New Jersey

Jordan M. Asch*

This article discusses New Jersey Executive Order 89, which calls on the Department ofEnvironmental Protection to establish a Statewide Climate Change Resilience Strategy,among other initiatives related to climate change adaptation.

As storms like Superstorm Sandy continueto grow more devastating and frequent, com-munities, governments, businesses, and indus-tries of all sizes and varieties must face thechallenge of adapting to a changing climate.October 29, 2019 marked the seventh anni-versary of Sandy hitting New Jersey. GovernorMurphy marked this occasion by signing Ex-ecutive Order 89,1 which calls on the Depart-ment of Environmental Protection (“DEP”) toestablish a Statewide Climate Change Resil-ience Strategy, among other initiatives relatedto climate change adaptation. “New Jersey isextremely vulnerable to the impacts of sea-level rise and global warming, and [this] Exec-utive Order outlines a bold and comprehensiveset of actions to ensure that our communitiesand infrastructure are more resilient againstfuture storms,” said Government Murphy aboutthe signing.2

The Executive Order

The preamble to the Executive Order notes

that New Jersey is especially vulnerable to theimpacts of climate change as a coastal state.Picking up on this administration’s Environ-mental Justice3 efforts, the Order acknowl-edges that minority and low-income communi-ties are disproportionately affected by theimpacts of climate change. Climate change ofcourse is an issue that also impacts all com-munities, including the business community,industry, and government. The preamble alsonotes that “studies show that each dollar spentto mitigate hazards, including those associ-ated with climate change impacts, results in asix-fold decrease in spending on recovery.”With that as background, the Order directs thefollowing action items.

First, the Order calls on the DEP to appointa Chief Resilience Officer (“CRO”) of the Stateof New Jersey, and DEP has acted quickly innaming David Rosenblatt, the Assistant Com-missioner of the New Jersey Department ofEnvironmental Protection (“NJDEP”) Divisionof Engineering & Construction to that position.

*Jordan M. Asch is an associate at Gibbons P.C., representing clients in environmental litigation in both state andfederal matters. He may be reached at [email protected].


71

The CRO will direct the Climate and FloodResilience Program, which is tasked withdeveloping and delivering to the governor aScientific Report on Climate Change and itsanticipated environmental effects through atleast 2050.

The Order additionally establishes an Inter-agency Council on Climate Resilience, whichis tasked with developing and implementing aStatewide Climate Change Resilience Strat-egy in conjunction with the CRO.

The Statewide Climate Change ResilienceStrategy is meant to “promote the long-termmitigation, adaptation, and resilience of NewJersey’s economy, communities, infrastructure,and natural resources throughout the State.”Specifically, the Resilience Strategy will aimto:

E Identify methods to strengthen climateresilience;

E Provide guidance and implementationstrategies;

E Promote long-term water and energy se-curity;

E Reduce the risk of wildfires in State for-ests;

E Reduce health risks that may be associ-ated with climate change;

E Support sustainable economic develop-ment;

E Identify financing mechanism, strategies,and opportunities to support climatechange resiliency measures; and

E Take any other measures deemed nec-essary by the CRO to prepare for, miti-

gate, and adapt to the impacts of climatechange.

The Resilience Strategy must also include aCoastal Resilience plan “that recommends aspecific long-term strategy for climate changeresilience and adaptation in the coastal areasof the State.”

Lastly, the Order calls on the State PlanningCommission to incorporate climate changeconsiderations as set forth by the ScientificReport on Climate Change and the StatewideClimate Change Resilience Strategy as amandatory requirement for the endorsementof municipal and other local development andredevelopment plans. The State PlanningCommission must also amend its regulationsto incorporate such considerations.

Concluding Thoughts

Per the newly-appointed CRO and DEP As-sistant Commissioner David Rosenblatt, “[w]eface many challenges from increasing temper-ature and sea-level rise. To meet those chal-lenges, we need to fully engage the public andstakeholders and provide a clear picture ofwhat the impacts will be, including physicalchanges to our coastline, and the steps thathave to be taken to adapt and become moreresilient.” Communities and businesses alikewill benefit by staying involved in the processas these challenges continue to mount.

NOTES:

1 https://nj.gov/infobank/eo/056murphy/pdf/EO-89.pdf.

2 https://nj.gov/governor/news/news/562019/approved/20191029a.shtml.

3 https://www.nj.gov/oag/newsreleases19/pr20191025a.html.



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